Companies are increasingly moving sophisticated, mission-critical functions such as product design and research and development to China, India and other offshore locations, according to a report.

It is primarily because these countries can provide highly skilled scientific and engineering workers who are in short supply in the US and Europe, according to the new study by Duke University and management consulting firm Booz Allen Hamilton.

Even though companies continue to offshore more high-skilled work, they are increasingly concerned about the loss of managerial control that accompanies outsourcing functions close to their core business, the management consulting firm said in a statement.

The 2006 Duke CIBER/Booz Allen offshoring study is the third in an annual series originated by the Offshoring Research Network (ORN) led by Professor Arie Y. Lewin at Duke's Fuqua School of Business.

The first two studies were conducted in 2004 and 2005 by Duke and Archstone Consulting. The 2006 study conducted by Duke and Booz Allen takes a comprehensive look at strategic factors driving decisions to offshore.

It also examines offshore operating delivery models and performance outcomes of various companies' offshoring efforts. The 2006 study examined 530 companies from both the US and Europe, through partnerships with universities in the United Kingdom, Germany, Spain, Netherlands, Belgium and Scandinavia.

Key findings of the study are:

* The need to source talent globally is replacing low-skilled, low-cost labour as the decisive factor in companies' offshoring strategy.

* Nearly three-quarters of the companies that establish or expand product development offshore report that "access to qualified personnel" is the most important driver of their offshoring strategy, and almost 70 per cent of survey respondents select an offshoring location based on the availability of needed expertise.

* “Access to qualified personnel" has increased substantially (by 70 per cent in the last two years) as a major reason for establishing or expanding innovation, product development and product extensions offshore.

Lewin, director of Duke/CIBER (Centre for International Business Education and Research) and lead principal investigator of the ORN project, said: "Companies in the advanced economies of the US and Europe cannot find domestically the high-skilled talent they need to sustain their innovation and growth strategies. The leading-edge companies are developing new ways to source and manage talent globally. They turn to China, India and other countries in Eastern Europe and Latin America in search of highly skilled talent.

"Companies offshore because they can't get it at home; they are reacting to the steady decline in the supply of graduates with advanced degrees in engineering and science and with the cutback in the annual H1b quota. Last year, it was estimated that US companies were in need of more than 50,000 master and Ph D graduates."

Historically the Middle East did not fair well as an offshoring centre due it relative high cost of labour and low access to qualified talent. This is slowly changing with the large inflow of qualified talent to the region, particularly to the Gulf, driven by the spectacular economic growth, enhanced quality of life and favorable tax environment.

Such trends have lead to the emergence of offshoring hotspots in the Middle East, with Dubai Outsoursing Zone being the most vivid example. Launched in 2005, Dubai Ooutsourcing Zone has managed to attract more than 70 companies and is targeting to quadruple this number in the next five years.

Contrary to popular belief, offshoring high-value tasks does not lead to major job losses at home, but to more net new jobs globally. In the US, offshoring projects that involved "high-skilled" functions such as research and development, sales and marketing, produ