Outsourcing innovation

In my advocacy for small business and start-up outsourcing, I’ve given short shrift to the research and development end of things, but this is a big focus in my current research. The Economic Policy Institute published a major study a few days ago, The Offshoring of Innovation, on the consequences of outsourcing innovation to India and China. Policy makers are worried: they see innovation as the trump card that the American economy holds. Lose the innovation game to India and China, they say, and all the air will come out of the American economy’s balloon. I’m in a different camp, which the report describes here:

Another group of policy experts . . . believe the emerging internationalization of science and engineering will offer the United States significant opportunities and that we are poised to capitalize on them. . . . the United States should focus on assimilating and commercializing the research being done overseas. . . . public benefits of R&D have been overstated, and that U.S. advantages are in entrepreneurship, where ideas and knowledge are commercialized. . . . it is acceptable for U.S. resource inputs to move overseas because America can benefit from a greater stock of knowledge without paying for it, and because it reallocates those resources to speed up the diffusion and adoption of technologies.

I am currently researching a book on the top ten opportunities for entrepreneurs in the next decade, and I’m convinced that the growth of innovation and knowledge production in Asia and elsewhere is a potential gold mine for America’s most energetic entrepreneurs: small business owners and start-ups.

Right now, entrepreneurs are very limited in their resources to research and engineer new products. Getting a product of any sophistication on to the market requires a pretty heft investment. Sure, developing a plush doll will only strain the most strained of bank accounts, but developing the next iPod up until now is a product only the big guys — or the small guys who attract big investments — could do. The offshoring of a engineering and science means that even a modest business could find the expertise to develop, prototype, and even bring a complex product to market.

This will never happen until another set of entrepreneurs develop an infrastructure to coordinate and rationalize offshoring for all types of business, a kind of “offshoring management” firm that allows businesses to outsource the management of outsourcing. This, of course, is the chapter I’m working on now: the development of outsourcing and offshoring management firms for the bottom end of the business scale.

So you heard it here first. One great opportunity that I’m extracting from this study is a business model in which you manage the offshoring of product development. Entrepreneurs pay a firm to manage the product science and engineering that is done in India, China, or some other exotic place. All aspects of product development, from engineering to CAD to rapid prototyping to beta development to testing, are all done offshore. The client, a small business or entrepreneur, interfaces with the company as if it were doing the product development. But all the brain work is done offshore; the company itself is simply an offshoring management company.

Once entrepreneurs build an innovation offshoring infrastructure, we’ll see a rapid increase in the offshoring of innovation. We will also see a rapid increase in wealth as one start-up after another brings complicated products to market in rapid time that really catch fire with consumers.

I can promise you that the second edition of Shoestring Venture will include offshore sources for product development. You can bank on that.

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