BANGALORE: The India IT industry is on an edge when it comes to research and development (R&D) activities. Apart from a poor rate of patents registrations from the country, the number of new companies setting up shop has dwindled 40 percent from 2005 to 2007; sub-scale captives no longer find it viable to maintain multiple R&D centers.

The cost factor, talent availability, improved infrastructure and increased domain experience remained the top reasons for offshoring to flourish in India early 2000s. However, cost is no more a key driver for offshoring R&D operations to India as companies seek to value the skilled R&D talent pool and emerging market opportunities also, according to a study conducted by Zinnov Management Consulting.

The drop in newcomers primarily has to do with the fact that all large captives wanting to benefit from a cost or talent perspective are already in the country. The availability of fast English speaking talent and cost factor still remains the USP of the Indian industry. If only the cost talent is leveraged, then the R&D offshoring will shift to vendors who would look for cheaper destinations elsewhere.

There are 250,000 engineers working in R&D ecosystem in India. However, the number of patents filed in India was as low as 2,387 in 2007 compared to South Korea (22,976) and Taiwan (18,486). South Korea and Taiwan have emerged as dominant players with patent rates of 23 percent and 14 percent, respectively, says Pari Natarajan, CEO, Zinnov Management Consulting.

India is ranked 58th in the Global R&D innovation performance index by EIU and is expected to climb only two levels up by 2011. The new findings come when India wants to level the playing field with the other "South Asian Tigers by 2020. To achieve this, India will need to grow at an average rate of 45 percent per annum in patent filing.

Natarajan said: We expect the R&D offshoring industry to grow at CAGR of 23 percent in an optimistic market scenario; wherein majority of the growth will be driven by large R&D centers and service providers. Most of the R&D centers in India are small firms with global revenue of less than USD 100 million."

On an average, the small R&D centers contribute between 80 percent and 90 percent of global R&D of the companies, whereas large R&D centers contribute about 25 percent to 35 percent to the global R&D. Natarajan added that the India centers are striving to become high-value centers. They have realized that there is strong need to have a local leadership in India and many MNCs senior executives in the country, he said.

R&D offshoring to India is now a $9.35 billion industry, with MNC-owned R&D centers accounting for about $5.83 billion of this market. This is expected to grow to be a $21.4 billion industry by 2012.