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As U.S. firms move more and more manufacturing, customer support, and now software development jobs to lower-cost countries, outsourcing has become one of today’s most controversial business trends.

Lost in the debate is a related idea that could be far more vital to future competitiveness: insourcing. As I use the term, this is the practice of opening operations in foreign countries, not to do current jobs more cheaply, but to generate new products and services that spur growth and create jobs. I’m particularly interested in research-and-development insourcing where firms insource foreign talent by creating labs in other countries. And a prime example of how to do this effectively can be found in this month’s cover story, “The World’s Hottest Computer Lab,” about Microsoft’s fast-growing Beijing research center.

On the surface, Microsoft isn’t doing anything new. IBM, for instance, operates research labs in China, India, Israel, Japan, and Switzerland. Scores of other tech firms, in everything from pharmaceuticals to electronics, operate R&D labs abroad.

So what’s so special about Microsoft’s venture? I have visited three dozen corporate research labs worldwide, many of them expatriate labs. I’ve studied the challenges they face, and their efforts to meet those challenges. Several things stand out about what Microsoft’s doing, but all boil down to how the lab has avoided being marginalized.

First, far from their mother ships, foreign labs often become second-class citizens in their own firms. Microsoft has escaped this trap in part by investing enough in the lab (more than $80 million, 150 full-time researchers, and 200-odd interns) that it has achieved critical mass. More importantly, the Beijing operation is an epicenter for several key areas of research, including graphics and wireless multimedia. I have seen at least three foreign labs fail because they were bit players in the research areas they covered.

Even this, though, does not fully explain the Beijing lab’s success in generating innovations that make it into products-some 70 in its first five years. The lab’s secret sauce, I think, is that two of its former directors, Kai-Fu Lee and Ya-Qin Zhang, have been promoted to executive positions at Microsoft’s headquarters in Redmond, WA. This is a huge stamp of approval, and source of motivation, for everyone at the lab. It also ensures strong ties between the lab and Microsoft’s product groups. In all my visits to foreign labs, I can’t remember this happening once, let alone twice.

The lab has also proved its value in China. To be a magnet for talent, a lab has to be seen by local officials and academics as a great place to send students and graduates. Through such practices as encouraging publication of papers and conducting collaborative research with universities, Microsoft seems to have passed this test.

The world is changing fast. According to a study released in February by five higher-education associations, the number of foreign students applying to American graduate programs is declining. U.S.-based technology firms like Microsoft know that to stay competitive, they must find new ways to tap that foreign talent.

Thanks and Farewell
As this issue goes to print, I will complete my second year as editor of Technology Review. At that time, I will step down and “reclaim” my previous position of editor at large.

I’ve had a great time, working with a fantastic staff, and getting to know many of you, our highly discerning readers. My new position will allow me to be more involved with the nitty-gritty of the magazine-and to dive into a new book project-but I’ll still be out and about and look forward to our continued interaction. Till then

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