The Internationalization of Corporate R&D

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THE INTERNATIONALIZATION OF CORPORATE R&DIn the past decade, the Chinese government has identified a number of ways toenhance or supplement its domestic innovative capacity. First, China hasimplemented effective policies for attracting R&D activities by foreign companies(this will be discussed in greater detail in Section 4). And China’s highlysuccessful efforts to attract FDI are arguably driven by the desire to upgradescientific, technological and innovative capabilities.Second, and a very important element of the government’s efforts to increase China’sinnovative capacity, are new incentive programs that encourage professionals of Chineseorigin to return to China (see for example Saxenian 2005). This applies to scientists,but also people with management and other significant business experience. Thus,the Ministry of Education set up a “Fund for Returnees to Launch S&T Research” in1990, which according to the Ministry’s website, has provided financial support ofmore than 350 million RMB (approximately 45 million dollars) to 11,000 returnees.The “Program for Training Talents Toward the 21 st Century” targets teachers returningfrom overseas studies. Started in 1993, it has granted 180 million RMB (23 milliondollars) to 922 people. Other programs, aimed at attracting Chinese-national studentsand scholars, finance scholars of Chinese origin wishing to return temporarily to Chinafor short-term visits, to conduct research, or to give lectures.Another example is the National Science Fund for Distinguished Scholars (NSFC),which was established in 1994 with the explicit objective of attracting overseas scholarsback to China. NSFC provides significant research grants of approximately 1 millionRMB (around 125 million dollars) for Chinese scholars with foreign nationality(NSFC homepage). Scientists willing to return to China are also offered entire state-ofthe-artresearch labs as well as prestigious titles and awards. Starting in the late 1980s,Chinese cities and High-Tech Development Zones began to offer tax breaks and otherincentives, such as free office space, better housing and fast-track promotions, for Chinesereturnees (Asia Times 2000).Between 1978 and 2003 around 700,000 Chinese citizens from mainland China wentabroad to study, mainly in the U.S., Japan and U.K.; approximately 170,000 are estimatedto have returned (Ministry of Education website). These returnees have been avital component of China’s innovation system, playing a key role in many of the country’sscientific and technological achievements, as well as its commercial success stories.Chinese returnees account for a high share of new-business launch and knowledgeproduction, in terms of scientific publications, patenting and licensing. Many of themhave been instrumental in setting up China-based R&D labs and institutes, both academicand corporate (People’s Daily 2003).236
THE INTERNATIONALIZATION OF CORPORATE R&DChinese professional overseas account for a significant portion of the FDI flowing intoChina, and they comprise a large number of the key personalities in China’s scientificcommunity, including national chief scientists. This group has also founded many ofthe country’s high-tech companies, and they have “played a predominant role in all ofChina’s prestige scientific projects such as the space programme and human genomemapping” (Financial Express 2005).Overall, China’s investments in knowledge (which have grown at an unprecedentedrate during the past ten years), combined with its policies for attracting knowledgeresources from abroad (both in terms of corporate R&D functions and human capital),reflect a clear and strong determination to strengthen China’s innovative capacity. Atthe same time, China’s innovation system suffers important shortcomings and Chinastill lags behind more developed countries in terms of knowledge outputs. In the followingsections we examine more closely two key instruments in China’s pursuit tobecome an innovation country: FDI and R&D activities by foreign companies.10.3 Foreign Direct Investment (FDI) in China10.3.1 One of the Largest FDI RecipientsAttracting FDI has been a cornerstone of the Chinese open door policy, introduced in1978, and has played an instrumental role in the transformation of the Chinese economy(see for example Long 2005 and OECD 2005b). While FDI inflows were relativelymodest in the 1980s, they increased dramatically in the early 1990s. Since then,FDI has been pouring into China, attracted by stable macroeconomic conditions, aswell as fiscal and other incentives, such as the provision of physical and institutionalinfrastructure, and the huge emerging domestic market. 8 Gradual liberalization of foreigninvestment and ownership restrictions have also contributed to a continued increasein FDI flows, thus briefly making China the largest FDI recipient in the world in2002/2003.In 2004, China attracted 61 billion dollars, or approximately 10 percent of total FDIinflows worldwide, making it the third-largest recipient after the U.S. and the U.K.(UNCTAD 2005b) (see Figure 10-2). According to The Economist, “[n]o other countryattracts as much FDI as China,” (The Economist 2005b).China’s FDI figures are likely to be overstated due to a practice known as “roundtripping,”whereby significant sums of money are taken out of China and then brought inagain as “foreign investment.” Investors therefore benefit from China’s preferential policiesfor FDI. According to some estimates, roundtripping accounts for around 20–308 For an analysis of capital inflows into China, see Prasad & Wei (2005).237
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The Swedish Institute for Growth Po
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