American businesses are increasingly moving their research and development operations to India and China. Debates rage in the United States about whether this will lead to greater prosperity or threaten the country’s global economic leadership. There are few facts in the debate, yet business and political leaders appear to be reaching consensus on how to respond to the rise of India and China: have more American children study math and science, and graduate more engineers and scientists.

This remedy’s most common justification is the supposed statistic that China and India between them graduate twelve times the numbers of engineers the United States does. Business executives such as Microsoft chairman Bill Gates say that they have no choice but to move their research and development operations abroad because a deficient US education system has resulted in a severe shortfall of engineers.

The Global Engineering and Entrepreneurship project team at Duke University has been researching this topic. We found that the graduation statistics in common use were misleading, as they were based on faulty comparisons. Our interviews with the executives of technology and engineering companies engaged in outsourcing research and development (R&D) to India and China revealed that their primary motivation in moving operations abroad was not a shortage of engineers but rather lower cost and the proximity of growth markets. Furthermore, we found that there were serious issues with the quality of engineering education in China and India.

Yet India is racing ahead to become a global hub for advanced R&D in several industries. In trying to understand how India is achieving this feat, we learned that the Indian private sector has found a way to overcome deficiencies in its education system through innovative programs of workforce training and development. These have transformed workers with a weak educational foundation into R&D specialists. In response, then, the United States needs learn from India and upgrade its workforce.
Engineering education
Various articles in the popular media, speeches by policy makers, and reports to Congress have stated that the US graduates roughly 70,000 engineers annually, while China graduates 600,000 and India 350,000. Even the National Academies and the US Department of Education have cited these numbers.

But no one has compared apples with apples. In China, the word “engineer” does not translate well into different dialects and has no standard definition. An “engineer” could be a motor mechanic or a technician. Chinese graduation numbers included all degrees related to information technology and to specialized fields such as shipbuilding. They also included two- and three-year degrees, making them equivalent to US associate degrees. Nearly half of China’s reported engineering degrees fell into this category. The Indian definition of “engineer” was equivalent to the US one, but included information-technology and computer-science degrees. When we counted on a more consistent basis, we found that in 2004, the United States and India each graduated approximately 140,000 engineers, and China graduated 360,000. Chinese graduation rates have, however, been increasing dramatically since 1999.

We found a similar trend in Masters and PhD degrees. In 2005, China graduated 63,514 Masters and 9427 PhDs in engineering, exceeding corresponding US numbers: 53,549 and 7,720, respectively. India’s graduation numbers were unimpressive: 18,439 Masters and fewer than 1,000 PhDs in engineering. In fact, India wasn’t graduating enough PhDs to meet the growing staff requirements of its universities. However, China’s increasing numbers came at the cost of quality: enrollments are increasing at all but the top universities without corresponding increases in faculty and infrastructure. The growth in India’s graduation rates was coming largely from private educational institutions, the quality of which varied significantly: some provided good-quality education while the majority, did not.
Sending R&D abroad
Our interviews with 78 senior executives of US corporations involved in outsourcing engineering work revealed that India and China were their top destinations for R&D work, with Mexico in third place. The data these companies provided—on time to fill open positions, signup bonuses, and acceptance rates of job offers for engineering—showed no indication of a tightening job market. In other words, they were not experiencing shortages of engineers in the United States. The reasons they named for going offshore concerned salary and personnel savings, overhead-cost savings, 24x7 continuous-development cycles, access to new markets, and proximity to growing markets.

These companies reported that American engineers produced work of better or equal quality and were at least as productive as their Indian and Chinese counterparts. Moreover, American engineers had advantages in education, cultural understanding, communications, and their understanding of markets. But Indian and Chinese engineers worked harder and cost significantly less.

When asked about current work being assigned overseas, nearly half of the companies we interviewed said they would hire engineers regardless of education level and would train them. Bachelor’s degrees in engineering weren’t mandatory prerequisites. The vast majority of companies stated their intent to continue to outsource—and their expectation to outsource higher-level research and development to these countries. They indicated that for these advanced R&D jobs, they preferred Masters and PhD degree holders.

It is evident that though India may have enjoyed advantages in lower-end IT outsourcing, it was ill-equipped to benefit from the next wave of globalization, in which higher-end R&D and innovation would increasingly go offshore. It appeared that the country best positioned to become a global hub for R&D was China.
Next Wave of Globalization
Recent interviews with executives of multinational companies in China and India as well as Indian native firms reveal that despite its low rates of postgraduate science and engineering graduation, India is rapidly becoming a global hub for R&D, with a momentum and scale similar to those it accomplished in IT services.

In the aerospace industry, Indian companies are designing the interiors of luxury jets, in-flight entertainment systems, collision-control and navigation-control systems, fuel-inverting controls, and other key components of jetliners for American and European corporations. In pharmaceuticals, Indian scientists are discovering drugs and performing clinical research for nearly all of the largest multinational drug companies. In the automotive industry, Indian engineers are helping to design bodies, dashboards, and power trains for Detroit vehicle manufacturers—and soon may develop entirely outsourced passenger cars. In telecom and computer networking, Indians are developing next-generation solutions for intelligent cities. They are also developing innovative solutions for the Indian marketplace, such as the $2,500 car produced by Tata.

China is already the world’s biggest exporter of computers, telecom equipment, and other high-tech electronics. Multinationals and government-backed companies are pouring hundreds of billions of dollars into next-generation plants to turn China into an export power in semiconductors, passenger cars, and specialty chemicals. China is lavishly subsidizing state-of-the-art labs in biochemistry, nanotech materials, computing, and aerospace technologies.

Despite its advantages in engineering-graduation rates, massive investments in infrastructure, and massive economic subsidies, China does not in fact appear to be moving at the same pace as India in R&D outsourcing. Foreign multinationals were driving an overwhelming proportion of R&D and innovation in China and that most of this R&D is targeted at developing products for the local Chinese market. There are some exceptions, but Chinese industry appears to be excelling in imitation rather than in innovation.
The 64 Million Dollar Question
If engineering education is so critical to global competitiveness, how is India succeeding? To answer this, we met with the CEOs, human-resource directors, R&D leaders, managers, and employees, and visited the R&D and training facilities of 24 leading companies in India. These were in rapidly growing emerging sectors, including IT services, business-process outsourcing, semiconductors, pharmaceuticals, financial services, retail, hospitality, and education—all of which have managed to grow and innovate despite skills gaps and talent shortages.
How the Disciple Became the Guru
During the 1970s and 1980s, the Japanese achieved major advances in manufacturing management, which led to their rise as an economic power. The Japanese economic miracle and the country’s new manufacturing skills and methods surprised western firms; but the Japanese had done this by studying, adopting, and eventually perfecting the best practices of western companies. The Duke team believes that India is achieving similar feats in workforce development: India has learned and perfected the best practices of leading companies that have been outsourcing their computer systems and call centers.

Faced with severe talent shortages, escalating salaries, and a lagging education system, Indian industry has had to adapt and has built innovative and comprehensive approaches to workforce training and management. The initial focus was on training new recruits and filling entry-level skill gaps. Now, these companies are investing in constantly improving the skills and management abilities of their workers and in providing incentives for them to stay and grow with the company. There is also widespread collaboration between industry players and academic institutions to accelerate the growth of needed talent pools.

We identified seven key areas in which Indian companies have developed innovative practices: employee recruitment, new employee training, continuing employee development, managerial training and development, performance management and appraisal, workforce retention, and education upgrades.

Though US and European corporations have excelled in many of these functions for decades, the Indians have developed a few innovative practices, including the way these programs are integrated into day-to-day operations and into systems of career advancement and reward; the application of technology to managing and integrating each of these processes; and the executive-level decision making that is performed based on these processes. Just as enterprise resource-planning systems are used to manage manufacturing and distribution operations in leading firms, the Indian systems help oversee the workforce management and development process.

Searching Far and Wide for Talent
India’s top five IT companies alone hired nearly 120,000 new employees in 2007. IBM India and Accenture India hired nearly 14,000 each in the same period. This doesn’t include the rest of India’s sizeable technology industry. Considering that the country now graduates only about 200,000 in engineering, computer science, and information technology and NASSCOM, Indian technology industry trade group estimates that only half of these graduates receive education of sufficient quality to be employable. It is clear that the ostensible shortage of skilled workers is being filled by other sources.

The Indian companies we studied have become innovative not only in how they recruit but also in whom they recruit and where they look for talent. Most of them have developed a recruitment philosophy to hire for overall skill and aptitude rather than specialized domain and technical skills. They rely on training and development to bridge skill gaps. Instead of hiring only from top engineering universities, technology companies recruit from second- and third-tier colleges all across the country and also in arts and science schools. Similarly, companies in the banking and hospitality industries hire from call-centers and the information technology sector. Diversity programs are also being implemented, both out of necessity and social purpose. Women and older workers in particular are being targeted by technology companies and call centers, which are also reaching out to rural and disadvantaged communities.
New Recruit Boot Camps
Companies in India have no choice but to assume that new recruits will have to be trained practically from scratch. They invest substantial time, money, and effort in the training function. Most large companies have built dedicated learning centers that house various training and development programs. The larger companies employ hundreds of training staff.

In the technology sector, new-recruit training programs typically span two to four months. In other industries programs range from two to four weeks. The training curricula are generally highly sophisticated and teach not only the required technical skills but also the basics of topics like industry operations, customer management, communications, and team building. Formal induction training is typically followed by on-the-job training programs in which employees are assigned specific tasks under the supervision of trainers and managers.
Investing in Their Employees
Faced with fierce competition for talent, rising wages, and pressure from a currency gaining significant value, Indian companies have had to invest in making their employees more productive and rapidly moving them up the skill and management ladder. This has the effect of increasing billing rates and productivity of employees, and lessening attrition because of the rapid career advancement that employees can achieve.

Employees are typically required to participate in a wide range of training and certification programs, some developed in house and some delivered by external domestic and foreign training vendors. Training programs include not only technical and domain training but also a wide range of soft skills and management skills, including training in six-sigma/quality processes; communication; and cultural, behavioral, foreign-language, and personal-effectiveness skills. In addition to online courses, many companies have instituted programs of mentorship by senior executives; peer learning and knowledge sharing; and job-rotation programs. Career advancement and salary increases are usually tied to the completion of such training.

Employers have also invested significantly to train and mentor future leaders from within the firm. The average age of first-line managers in the Indian companies we studied is below thirty. Managers are typically grown through fast-track programs that provide management training and mentorship to high-performing employees. Preference is usually given to internal staff to fill a management opening before outside recruitment is considered. Performance-management systems usually play an important role in identifying high performers, creating an inventory of existing skills and strengths, and identifying skill gaps. They are used as a basis for career development through training, on-the-job experience, and coaching and mentoring.

All of the Indian companies we studied have implemented sophisticated performance-management and appraisal systems to create greater transparency and fairness in evaluation and rewards. Mechanisms such as 360-degree reviews and balanced-scorecard reviews are widely used. Managers are evaluated on a variety of non-financial measures, including employee satisfaction, attrition rates, and mentoring.

Performance management has been fully integrated with training and development at most companies, using periodic reviews to identify training needs, provide feedback and coaching, and facilitate employees’ goal setting and career planning. Feedback sessions typically follow performance evaluations, and goal-setting processes are used widely as opportunities to communicate with employees; assess their interests, needs, and aspirations; plan their careers; and match their skills and aspirations with company and project needs.

Most companies have been able to achieve dramatic reductions in employee turnover by carefully analyzing recruitment, performance, and attrition data to identify patterns and predictors of attrition. Along those lines, corporate communications and employee engagement in the company and its programs are always a priority, and company executives are usually measured on their retention rates. All of this has led to constant refinements in all facets of human-resource practices.

Furthermore, Indian companies appear to have a high level of interaction with the private colleges and universities that supply them with talent. This involves working with these institutions to develop customized degree programs, train the educators, create new curricula, and negotiate deals to hire graduates in bulk—without job interviews.
Globalization poses many new challenges to US competitiveness and the current remedies do not cure the right disease. We are not going to be able to compete with India and China by matching their numbers in engineering graduation or by erecting trade or immigration barriers.

Education is amongst the most important investments a nation can make in its future, with math and science as particularly important subjects. But if we focus only on teaching more math and science to children who are presently in grades K–12, we will have lost the global race by the time they graduate from college, 10 to 15 years from now. Moreover, we need to compete on our strengths, which include innovation, entrepreneurship, and the ability to learn and adapt. The Indian experience highlights what can be achieved by investing in upgrading the skills of the workforce. If workforce training can take the output of an education system as weak as India’s and turn its graduates into world-class engineers and scientists, imagine what could be done with a worker base that has received among the best education in the world, as is the case in the United States.

US companies have long played the guru, developing and disseminating many widely adopted management and workforce practices. The time has come for the guru to learn from one of its disciples: India.