Arm, the Cambridge-based semiconductor company and standard bearer for the UK technology sector, is to open a research-and-development laboratory in India or China.

Its initiative will heighten concerns that highly skilled occupations are being transferred from the UK to Asia - where employment costs are relatively low - along with more basic jobs in services and manufacturing.

A former member of the FTSE100 index, Arm is one of the UK technology sector's few global success stories. Its plan is a blow to the UK's reputation as a centre for new technology, despite the fact that no domestic jobs will be lost as a consequence of the investment.

Executives at multinational firms say they can no longer ignore India's highly educated workforce when assessing where to locate their businesses. "The quality of their graduates, especially in science and maths, is so high, that we would be mad not to employ them," said one.

"It's not just that they are cheap. They tend to have better skills than their British or American counterparts".

Last month, GlaxoSmithKline announced an alliance with India's largest drugs company, which will see research and clinical trials outsourced to Indian scientists.

Also, McKinsey, the global management consultancy firm, now employs more research staff in India than in Britain and some investment banks are working on plans to move analysts to India.

Reuters has recently announced plans to move hundreds of jobs to the sub-continent.

Arm's plans are at an early stage, although the company's board has decided that the new centre must be built in "a low-cost region". Warren East, chief executive of Arm, is looking at India and China, although there is a chance that some investment may be made in eastern Europe.

The company hopes to double the number of engineers it employs within five years. The majority of these are expected to be employed in the group's new research and development facility.

The company currently has 400 engineers in Cambridge and Austin, Texas. They design chips for digital cameras, printers, mobile phones and handheld computers.

Last month, Arm announced better than expected third-quarter results and said there were signs of recovery in the semiconductor sector.

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