Multinational corporations (MNCs) have increasingly located research and development (R&D) in developing countries such as China and India since the 1990s. On the one hand, governments in developing countries are eager to attract R&D to their local economies; on the other hand, developed countries are concerned about losing their competitive advantage due to R&D offshoring. At the same time, intellectual property protection is a growing concern.

What are the MNC R&D labs actually doing in China? Quan noted that her 2004 survey of MNC R&D labs in information technology industries in Beijing found that these MNC R&D labs are not just providing technical support, product localization, or product development for the local market; rather, they are developing products for the global market. Her study documents an emerging spatial division of labor in R&D based on the increasing specialization of R&D activities.

Ensuring returns appropriation

Appropriating returns is essential to continuous R&D investment. However, returns appropriation is not necessarily realized through formal IP protection institutions such as the patent system. As the growing trend of globalization of R&D has evolved to this new stage characterized by MNCs locating R&D labs in developing countries, it provides a good test bed to further explore more theoretical mechanisms of IP protection. Considering the weak intellectual property rights regimes these developing countries typically have, it is crucial for MNCs to find an effective way to protect their valuable technologies thus facilitating returns appropriation from their R&D activities in host developing regions. It is in fact the effective means of IP protection that can greatly assist MNCs' location of R&D offshore, in addition to other well-known incentives such as low cost R&D labor and market attraction.

R&D specialization essential

Using evidence from MNC R&D labs in Beijing and Shanghai, Quan's study proposes that R&D is further specialized within MNCs' global R&D network. Furthermore, IP protection and returns appropriation can be realized through such R&D specialization. The key proposition is formulated as below: 'Hierarchical modular R&D structure can be an effective way for MNC R&D labs to protect their intellectual property and thus facilitate returns appropriation in weak IPR regime developing countries'. This 'hierarchy' includes 'core R&D' and 'peripheral R&D', based on two dimensions--technology value-added, desire and ease of IP protection. While 'core R&D' is mostly done in developed countries, 'peripheral R&D' is conducted in developing countries. Dr. Quan's study suggests that this hierarchical modular R&D structure facilitates the global configuration of MNC R&D labs.

Slides from this presentation can be found at the event link below.

SELECT: What is the current size of the outsourcing market? What percent of U.S. software development, call centers, etc., have already moved to developing nations? Is the amount of outsourcing still increasing?

Dossani: To provide some perspective, although the off-shoring of services has been going on for mans Nears, technology led by the widespread use of the Internet has changed things. The resulting new twist in the provision of services is that the required interaction between the seller and the consumer has been substantially limited. The advances in information technology made possible the parsing of the provision of certain services into components requiring different levels of skill and interactivity As a result, certain portions of the serviced activity that might or might not be skill-intensive, but required low levels of face-to-face interaction could be relocated offshore. The sequence of events that enabled this process is the following:

First, the digital age allowed (or, at least, revolutionized) the conversion of service flows into stocks of information, making it possible to store a service. For example, a legal opinion that earlier had to be delivered to the client in person could now be prepared as a computer document and transmitted to the client via e-mail or, better yet, encoded into software. Easy storage and transmission allowed for the physical separation of the client and vendor as well as their separation in time. It also induced the separation of services into components that were standardized and could be prepared in advance (such as a template for a legal opinion) and other components that were customized for the client (such as the opinion itself) or remained non-storable. Taking advantage of the possibility of subdividing tasks and the economies that come with the division of labor, this reduced costs by offering the possibility of preparing the standardized components with lower-cost

labor and, possibly at another location.

The second fundamental impact of digitization was the conversion of non-information service flows into information service flows. For example, the sampling of tangible goods by a buyer through visiting a showroom is increasingly being replaced by virtual samples delivered over the Internet. Once converted to an information flow, the service may also he converted into a stock of information and subjected to the above mentioned forces of cost reduction through standardization of components and remote production.

Third, the low-cost transmission of the digitized material accelerated the off-shoring of services. Services such as writing software programs which were off-shored to India in the early 1970s were enabled by digitized storage and, in the 1980s, by the standardization of programming languages. Still later, as digital transmission costs fell in

the 1990s (just as digital storage costs had fallen earlier), even nonstorable

services, such as customer care, could he handled offshore.

The offshore services outsourcing market (excluding software development) is still small and will probably be approximately $10 billion for 2005. It employs about 500,000 people, two thirds of whom are located in India. The rest are widely distributed, with developing Asia and Ireland accounting for most of the remaining employment. About 60% of the employment is in call centers. The U.S. and U.K. call-center industry together employ about five million people, so the percentage of offshore jobs is still small. It is even smaller for other services.

Offshore software development employs approximately another 500,000 people. This compares with U.S. employment of about two million. This is a larger percentage of the total software development labor market. although most of the outsourced work is programming, while work such as systems integration and design continue to be done in the U.S.

The growth rate is still high and there are concerns about whether or not this rapid growth rate will hurt the quality of work done. However. this rate will still likely he in excess of 30% in 2005 and 2006. The reason for this is the massive wage differential.

Clearly there have been massive failures as well as outstanding successes in outsourcing. What are the critical success factors for making outsourcing work?

The infrastructure (telecom. finance, power) has all been standardized, although the solutions might not he the same as in developed countries. The critical success factors are two: the quality of labor and supervision; and managing growth. Unbelievable there is a growing shortage of labor. The result is that the quality of work is declining. Project supervisory skills are also in short supply. Managing growth, especially keeping attrition

under control, training, developing new vertical skills, moving into back-office work, and offering the client turnkey packages are some of the critical managerial factors for success.

Short of being willing to work for $15,000/year, what can western IT professionals do to provide sufficient value to prevent their functions from being outsourced?

The U.S. educational system still turns out a good product. It is sufficiently ahead of the comparable Indian product so that a recent computer science/computer engineering graduate from the average U.S. university can earn a premium of at least 100% over his Indian counterpart from a good university such as the IlTs, with substantially higher premiums for graduates from schools such as MIT and Stanford. The problem occurs more with mid-career professionals. Those with older skills are unable to compete with freshly trained graduates from India. Therefore, they need to update those skills regularly and take advantage of opportunities to globalize and convert them into managerial skills. This may have to he mandated at some point, as has happened in the financial sector, where stockbrokers need to regularly sit for exams to renew their licenses.

That said, most of the offshore jobs are relatively low-skilled. For example, the single largest category of offshore services is outbound calling for the financial services industry for selling mortgages or collecting overdue receivables. The work is routine, based on scripts that pop-up on the computer screen in response to prompts.

Do these findings suggest that developed countries are likely to be only marginally threatened by the globalization of services? Even if high-end work is stays within developed countries, as has happened in the software industry, the problem is that not everyone in developed countries can readily shift to high-end work. Since the 1960s, the shift in the economies of developed nations towards service-based economies certainly increased the number of highly-skilled service workers, but there was an even greater swelling in the number of other less-skilled service workers. This is partly a consequence of the nature of many services as linked, inseparable sets of activities with different

skill levels, combined with a pyramid of labor requirements, i.e., there is more demand for lower-level work than for high-end work. In manufacturing. the unemployment created by the reduction in demand for blue collar labor in developed countries was offset by the absorption of much of the surplus labor into service industries, often with minimal training. But the shift of low-end service workers to high-end workers will require a longer period of re-education and may have significant interim consequences on unemployment rates.

The threat to developed countries is increased by the fact that, apart from software, the largest growth in off-shoring is happening in business services. These are also the sectors with the largest growth in U.S. employment.

Further, there is evidence that even higher skilled functions can be moved offshore or might evolve on their own. For example, interviews with people at a firm earlier this year revealed that they had initially been contracted by an American firm to call its clients with overdue credit card payments. The offshore company eventually purchased the receivables from its client and assumed the collection risk itself. Another firm, Wipro Spectramind, managed the radiology services of Massachusetts General Hospital for its second and third shifts. Thus, American radiologists, who earn an average of $315,000 a year were replaced by Indian radiologists, who earn $20,000 a year on average.

I understand that there is a whole subculture in Pakistan and India of people who go to work in the late afternoon or evening and then work a full day on U.S. time. What effect has outsourcing had on the cultures of the countries that are recipients of much of the outsourced work? Have labor rates dramatically increased? Is it difficult for local companies in India and Pakistan to get quality IT talent?

Indeed such a subculture now exists. It is viewed as very stressful work and not suitable for a long-term career. Companies that do such work try to ameliorate the stress by hiring psychiatric counselors to provide free counseling to stressed-out employees. They also provide free meals and transportation, sports facilities, etc.

However, labor rates have increased only, a little. This is more than offset by

the rise in productivity of this labor over time.

Outsourcing is clearly a temporary solution. As labor rates equalize, the benefit of outsourcing decreases. In Pakistan and China, there are still huge differences in labor costs, but in Turkey, rates are closer to what they are in the 11.5. and other Western states. Realistically, how long can we gain a significant benefit form outsourcing?

India and China, and to some extent, Pakistan, have large labor pools. That is why, in manufacturing, Chinese wage rates have not changed despite massive employment growth over the past three decades. I think that wage rates in India will actually fall because of increasing supply, which is being drawn into outsourcing. This would mean several more decades of benefit from outsourcing.

One way in which developed countries may retain value is if their firms control the work done, either through providing the risk capital or through subsidiaries. While it is difficult to predict which organizational types will dominate, a number of firm-specific factors that influence the liability of off-shoring and organization structure are summarized here:

The knowledge component of the activity. A higher knowledge component makes the firm more concerned about whether the quality of the service will change due to a location change or the transfer process.

The interactive components of the process.

The ability to modularize the process

Savings from concentrating an activity in one location, leading to

benefits of scale and scope.

Reengineering as part of the transfer process. To transfer a business process, it is necessary to study it intensively and script the transfer. In the process of study, often there will he aspects of the current methodology for discharging the process that do not add value. Very often these aspects are legacies of earlier methodologies that were not eliminated as the production process evolved. During the act of transfer these are easier to abandon than at an existing facility' where they have become a "natural' part of the daily routine. Our interviews identified other unexpected benefits that go beyond the efficiency effects. Simply examining the business processes may reveal previously undetected inefficiencies. During the transfer process, these inefficiencies can be addressed without disrupting work patterns. Workers in the new location then use the reengineered process which is usually more efficient.

The time-sensitive nature of the work.

At a time of unusual US interest in south Asia it is useful to see how specialists there look at the two issues explored in this book -- the Kashmir conflict and south Asian nuclearisation. Twelve of the 15 contributors are US-based and therefore it is not surprising that the book is largely by Americans for Americans. But this does not detract from its value for Indians and Pakistanis, because the scholarship is impressive and analyses mostly free of bias. The volume contains 13 essays including a short introductory one by the editors. The remaining 12 are grouped into three parts.

The four essays in the first group (Pakistan: Politics and Kashmir) are "Islamic Extremism and Regional Conflict in South Asia" by Vali Nasr, "Constitutional and Political Change in Pakistan: The Military-Governance Paradigm" by Charles H. Kennedy, "The Practice of Islam in Pakistan and the Influence of Islam in Pakistani Politics" by C. Christine Fair and Karthik Vaidyanathan, and "Pakistan's Relations with Azad Kashmir and the Impact on Indo-Pakistani Relations" by Rifaat Hussain.

Vali Nasr provides a succinct account of how Islamic fervour and Islamic extremism grew in Pakistan after 1971 and how political players in the country, especially the army, tried to make use of it for domestic political and foreign policy gains. He provides a good analysis of how the Pakistani elite is torn between de-emphasising Islam for the sake of socioeconomic gains and stressing it for political advantage. In case of the army there is the additional factor of "jihadi" usefulness in pursuing regional strategic aims.

Charles Kennedy presents an interesting analysis of how the army captures power and holds on to it. He shows how Ayub Khan, Zia-ul-Haq and Musharraf have adopted essentially the same approach in this regard -- following the stages of making things legal, eliminating political opponents, becoming president, stressing local government, intimidating bureaucracy and judiciary, fixing the constitution and orchestrating elections. Two key observations he makes at the end are "the failure to develop a stable constitutional system is the fault of both Pakistan's military and civilian leadership" and that "constitutional stability can only be achieved if there is an accommodation between the interests of the two sets of actors."

Christine Fair and Karthik Vaidyanathan have tried to assess the influence of Islam in Pakistan partly on the basis of three polls conducted to gauge Muslim reaction to war against terrorism, and partly on the basis of interviews. Two noteworthy conclusions of the authors are that there is little popular support for extremist Islam in Pakistan (the good performance of MMA in the 2002 elections is rightly attributed to the political vacuum created by Musharraf and strong post-9/11 anti-Americanism), and that the Pakistan military's current effort to control, rather than eradicate, terrorism cannot work.

Rifaat Hussain has given a detailed account of India-Pakistan relations during 1979-2004, but his effort to explain Pakistan's relations with "Azad" J and K does not go beyond the little that is generally known. The lack of detailed, unbiased information about the society and politics of "Azad" J and K, which Pakistan pretends is not under its thumb, and of northern areas, which Pakistan has unabashedly incorporated into itself, is a major knowledge-gap that handicaps the search for peace in J and K.

The four essays in the second group (India: Politics and Kashmir) are "Who Speaks for India? The Role of Civil Society in Defining Indian Nationalism" by Ainslie T. Embrie, "Hindu Nationalism and the BJP: Transforming Religion and Politics in India" by Robert L. Hardgrave Jr., "Hindu Fundamentalism, Muslim Jihad and Secularism: Muslims in the Political Life of the Republic of India" by Barbara D Metcalf, and "Jammu and Kashmir in the Indian Union: Politics of Autonomy" by Chandrashekhar Dasgupta.

In his essay Ainslie Embrie has tried to explicate the complex relationship between the state and civil society in India. The tension and overlap between secular and Hindu nationalisms have been presented with deep understanding. The Gujarat massacres of 2002 have been explained in relation to the various constituents of the Sangh parivar. Indian attitudes to matters of sub-nationalism have been explained not only in relation to Kashmir but also to the north-east and Punjab.

Robert Hardgrave's essay covers much the same ground although the focus is more squarely on the BJP and the RSS. He speaks of sections within the RSS that want to align "Hindu" India with the west against Islam. At the same time he underscores how the demands of power have moderated the ideological temper of the BJP. Both Embrie and Hardgrave have written with western readers in mind and much of the ground they have covered would be familiar to Indians.

Barbara Metcalf's essay about Muslim Indians draws attention to the fact that the post-9/11 war against terrorism evoked no response from them, unlike the case with Muslims elsewhere. She has explained thoughtfully the reasons for this as well as for the rise in anti-Muslim sentiments in India from the 1980s. The contents of this essay can provide useful insights to Indians and Pakistanis. Metcalf warns that Hindu extremism can help recruit Muslim terrorists in Pakistan and Bangladesh and, in the long run, possibly within India itself. She also makes a case for declaring organisations like the VHP "terrorist" in the light of Gujarat killings.

Chandrashekhar Dasgupta's essay on J and K and autonomy is "balanced" by Indian standards. He writes that New Delhi should "accommodate Kashmiri demands for autonomy to the maximum extent compatible with the legitimate regional interests of Jammu and Ladakh and with the requirements of democracy and good governance in the state as a whole. The interests of Jammu and Ladakh can be protected by a mix of regional autonomy; devolution of power to lower (district, sub-divisional and panchayat) levels; and an equitable inter-regional revenue-sharing formula." But while offering this sound advice, Dasgupta has carefully steered clear of examining its practical implications.

The four essays in the final group (India's and Pakistan's Nuclear Doctrines and US Concerns) are "The Stability-Instability Paradox: Misperception, and Escalation Control in South Asia" by Michael Krepon, "Pakistan's Nuclear Doctrine" by Peter R. Lavoy, "Coercive Diplomacy in a Nuclear Environment: The December 13 Crisis" by Rajesh M. Basrur, and "US Interests in South Asia" by Howard B. Schaffer. In the reviewer's view, this is the most interesting of the three sections in the book and merits careful reading in both India and Pakistan.

Michael Krepon has explored the ramifications of the use of force by south Asia's nuclear-armed adversaries. He stresses the danger emanating from the two sides drawing (largely for public consumption, in the reviewer's view) opposing lessons from tests-of-will like the Kargil war and Operation Parakram. A useful point to note is how Krepon has, over the years, shifted stress from nuclear confidence building measures(CBMs) to conflict resolution in reducing nuclear risks in south Asia. This can be seen from the following sentences in his concluding paragraph: "Much could go badly wrong on the subcontinent unless Pakistan's security establishment reassesses its Kashmir policy and unless New Delhi engages substantively on Islamabad's concerns and with dissident Kashmiris" and "The best chance of defusing nuclear danger and controlling escalation lies in sustained and substantive political engagement." Nuclear CBMs can only do so much.

Nuclear Doctrine

Peter Lavoy's essay is a good piece on Pakistan's nuclear doctrine. He has listed eight separate "uses" for Pakistan's nuclear weapons. In specific relation to India, there are four, viz (i) Last resort weapons to prevent military defeat or loss of territory; (ii) Deterrent to conventional military attack; (iii) Facilitators of low-intensity conflict; and (iv) Tools to internationalise the Kashmir issue. He has drawn attention to the fact that Pakistan's nuclear "redlines" are vague which, the reviewer might add, is true of all countries that reserve the right of "first use."

Rajesh Basrur's essay is about the coercive and nuclear dimensions of Operation Parakram. His narrative of events, diplomatic moves and public statements is valuable for separating chaff from wheat. He has drawn attention to how much India's "compellence strategy" was played out through the US, which had forces in close vicinity. During the confrontation both India and Pakistan sought to "create a fear of nuclear war in the global community, especially the US". He also highlights the fact that India decided to withdraw its forces when Pakistan ceased "responding" to Indian pressure.

The book has no conclusion. The last essay is by Howard Schaffer on US interests in south Asia. Schaffer writes about how the relatively low US interest in the India-Pakistan hostile relationship began to climb in the 1980s when the threat of nuclear war entered the calculus. He says "The US has now come to regard Kashmir less in terms of the equities of the issue -- the lot of the Kashmiri people, the morality or immorality of the insurgency in the Kashmir Valley. Instead it sees the dispute primarily as a tinderbox that could be the flashpoint of a nuclear conflagration." He concludes his essay with the comment that "Washington's view of US interests in the region and the way it goes about promoting them" is unlikely to become more consistent than in the past. Both are valid observations and Indians and Pakistanis would do well to mull over their many implications.

It is not stated in the book, but this volume had its beginnings in a conference at the Asia-Pacific Research Centre in Stanford in early 2003. This was soon after Operation Parakram and before India-Pakistan relations began to thaw in late 2003. Although contributors have updated their narratives to mid-2004, the milieu in which the arguments have evolved was a period of considerable tension. The peace possibilities that have opened up in early 2004 and have got slowly augmented since have, therefore, not been adequately factored in. The book has avoided making any kind of prediction about peace prospects in south Asia although the very title of the book leads the reader to expect some exploration in this area.

Pre-emption used to be the watchword of Bush foreign policy. The world's sole superpower would not hesitate to wield force against an imminent threat to its security. The old doctrines of the Cold War era -- of containment and deterrence of a potential enemy -- were disdained as weakness.

Now, facing the most serious national security challenge since the end of the Cold War -- the nuclear weapons programs of Iran and North Korea -- the administration is reaching back to those oldies but goodies.

The determination of Iran and North Korea to develop nuclear weapons has so far been largely unchecked by this administration. The North Koreans, since breaking out of the freeze agreed to during the Clinton administration, have been steadily producing plutonium, and presumably warheads. The Iranians, after the election of hard-line President Mahmoud Ahmadinejad, reversed their deal to suspend uranium-enrichment activities, the crucial step toward nuclear weapons.

Diplomatic negotiations in both cases have produced little movement. But a military strike on their nuclear facilities is almost inconceivable. The danger of potentially horrendous retaliation and the sapping of American will and resources in Iraq have almost killed that option.

"As shaky as a policy of containment is, it is certainly preferable to confrontation, 'rollback,' or 'regime change' through military force,'' wrote conservative national security expert Thomas Donnelly in a recent analysis. "Containment is, in fact, regime change by tolerable means, and the solution to the problems of Iran and North Korea lie in an indirect approach.''

While we try to contain a nuclear Iran and North Korea, suggested Donnelly, we should surround Iran with movements for democratic change in Iraq and Afghanistan. North Korea, he believes, will be changed through Chinese influence.

Donnelly cautions that there may be circumstances when containment proves even more risky than intervention -- say if Iran tries to slip nuclear materials to Islamist terrorists. Iran is less stable than the Soviet Union, though it is worth remembering that the first 15 years of the Cold War brought us to the brink of nuclear war once and close to it several times.

For the administration, this is a stealth policy shift. That is no surprise. It flows directly from the mess in Iraq, a mistake the administration can never really acknowledge.

For those who once touted American global domination, it is still hard to face the reality that containment is impossible without allies and partners. By ourselves, we cannot press those regimes by cutting off their access to investment and advanced technology.

The administration is rightly moving to take Iran to the United Nations Security Council to seek a mandate to enforce the demands of the International Atomic Energy Agency. North Korea is undoubtedly watching this carefully.

China and Russia, who have veto power in the Security Council, are reluctantly going along. But they still resist any move to impose economic sanctions against Iran. Nor are the Europeans, Japanese and others who depend on oil and gas from Iran eager to halt their investment and trade.

Similarly in the case of North Korea, the Chinese and South Koreans are not prepared to cut the flow of economic aid and investment into the otherwise isolated North Korean state. This is less a case of economic interests than a fear that sanctions will escalate to greater confrontation, even war.

"The strategic challenge the Bush administration faced was to convince the rest of the world that Iran is more dangerous than the United States,'' says nuclear proliferation expert George Perkovich. "They finally did it -- and it took Ahmadinejad to do it,'' referring to the inflammatory rhetoric, including threats to "wipe Israel off the map,'' issued by the Iranian leader.

The administration made some headway down the same path with North Korea by engaging in direct talks with that regime this past fall, dispelling the image that the United States was unwilling to negotiate. But that progress has been undermined recently because hard-liners inside the Bush administration pulled the plug on such talks.

Managing an effective containment partnership will be a huge challenge. And there is still tremendous resistance inside the administration to engaging and negotiating -- and compromising -- with the enemy. But that was always a part of making containment succeed, even at the height of the Cold War.

Containment is no silver bullet. It is merely, as Donnelly puts it, "the least bad alternative, but not by a lot, and not under all circumstances.'' And right now, it is the only game in town.