Multinationals Continue to Expand India R&D Centers

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More than a fifth of the revenue generated by India's IT industry comes from the Indian subsidiaries of multinational companies, which continue to expand their presence on the Asian subcontinent, according to a new report.

Multinational companies accounted for about US$11 billion or close to 22 percent of the export revenue of Indian's IT and BPO sector in the fiscal year ended March 31, according to the report by the National Association of Software and Service Companies (Nasscom) with Zinnov Consulting.

Export revenue from these subsidiaries is now three times what it was seven years ago, it added.

India has currently over 750 subsidiaries of multinational companies that employ 400,000 employees. Most of these companies are from the U.S. or Europe, according to the report.

Besides technology companies that do R&D in India, large services companies like IBM, Hewlett-Packard, and Accenture have also set up services operations in India to address their global customers. Some large banks and financial services companies have also set up back-office operations in India to take advantage of the availability of low-cost staff in the country.

There isn't a uniform pattern to the decisions that multinational companies have taken regarding their Indian subsidiaries, said Siddharth Pai, a partner at outsourcing consultancy firm, Technology Partners International (TPI).

Multinational companies that set up Indian subsidiaries for noncore work like IT services and BPO, with an eye to cut costs, are now increasingly looking at monetizing their investment, and contracting the work instead to outsourcers with operations in India, Pai said. Earlier they had no option but to do the noncritical work in-house, because the outsourcers in India were still in their early stages, he added.

Companies that set up operations in India to do core product development are however likely to continue to expand in India, Pai said. Some other companies are using a hybrid model in India, by which critical work is done in-house at the subsidiaries, while noncritical work is contracted to local outsourcers, he added. Microsoft is for example using the hybrid model in India.

The largest segment of Indian subsidiaries of multinational companies are in engineering and R&D operations which account for $4.8 billion in export revenue, according to the report. The IT services subsidiaries account for about $3.4 billion, while BPO subsidiaries contribute $2.9 billion to India's export revenue from outsourcing, it said.

Some subsidiaries in India offer high cost savings and productivity that is higher than in the parent organization, Nasscom said. Other captives however follow similar models and processes as their headquarters which are sometimes sub-optimal in the Indian context leading to cost inefficiencies, low productivity and lack of innovation, it said.

The report suggests that global processes must be localized giving more decision making capability to the Indian center while maintaining global practices.

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