The Internationalization of Corporate R&D

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THE INTERNATIONALIZATION OF CORPORATE R&DOverseas Chinese investors, and the favorable treatment they received by the Chineseleaders, paved the way for the second wave of foreign investment, which accompanied theentry of big, multinational companies. In addition to seeking lower production costs forgoods to be exported, these companies are increasingly attracted by the domestic Chinesemarket. The dramatic increase in FDI inflows in the early 1990s is partially explained by theopening of the Chinese market to foreign MNEs, which began around the same time (Hou2004). Just a glance at Global Fortune 500 companies reveals that in certain sectors (e.g.motor vehicles and parts, pharmaceuticals, chemicals, electronics, computers,semiconductors, engineering, consumer food products, construction and industrialequipment), the largest companies have direct investments in China. 13Today, China’s domestic market remains one of the major pull-factors for FDI inflows. 14Its sheer size, together with unparalleled growth rates, makes China one of the mostattractive markets for multinational companies in the world. For example, China’s mobiletelephone market, already the largest in the world, is growing by five million new mobilephone users each month. Measured according to sales in 2005, its market for passenger carsis the second largest in the world, after the U.S. (People’s Daily 2006a). These and otherexamples – such as a 200 percent rise in chocolate imports in the past four years – reflectboth a dramatic pace of economic development and a rapidly emerging middle class ofbetween 100 and 300 million, with a pent-up desire to enjoy the comforts of wealth.Overall, FDI inflows into China have been driven by a combination of preferential policies,a large domestic market, low production costs, and a number of favorable frameworkconditions, such as physical and institutional infrastructure, perceptions of economic andpolitical stability and a generally FDI-friendly environment. 15 China has actively courtedforeign companies because it has viewed FDI as a panacea, or quick fix, for many of itsshortcomings. Thus, FDI is currently encouraged for purposes of increasing the productivityof China’s agriculture, contributing to the development of China’s western regions,strengthening China’s export performance, improving the access to and efficient use of rawmaterials – to name just a few (Long 2005). However, perhaps the most importantmotivation behind China’s preferential FDI policies has been to augment domesticinnovative capacity and the competitiveness of its companies by “importing” knowledge,management skills and technologies from abroad (see Section 4 of this chapter).13 The Global Fortune 500 is a ranking of the 500 largest companies in the world by revenue. According to web searchesand the homepages of the Global Fortune 500 companies, at least two thirds had some form of FDI in China.14 A survey conducted among Japanese and Korean companies found potential market size to be the mostimportant reason for undertaking FDI in China (NIRA 2002).15 According to a recent survey by A.T. Kearney, the factors that make China more attractive to foreigninvestors than India include: the large domestic market, preferential FDI, low production costs, infrastructure,and macroeconomic stability. The survey is referred to in India Chronicle, No. 003, August 2005,www.sunmediaonline.com/indiachronicleaugust/bilateraltrade.html.240
THE INTERNATIONALIZATION OF CORPORATE R&DRecently, there has been growing criticism of China’s strong focus on investment,including its policies for attracting FDI. China’s FDI policies are seen to be effectively“tilting” the playing field in favor of foreign and foreign-funded companies (see forexample China Daily 2004, and Prasad & Wei 2005). Some observers claim thatIndia’s less aggressive promotion of FDI, and its “favoring [of] domestic investmentover foreign,” has allowed the development of domestic companies that can now competeon the international market (The Economist 2005b). Economists are starting toquestion whether China’s policies aimed at promoting investment are beneficial forChina’s long-term economic development and prosperity. The debate over the benefitsof preferential investment policies is partially connected to concerns about growinginequalities and accusations that China’s growth has benefited a small minority at theexpense of the vast majority of people. Kuijs and Wang argue that:...reducing subsidies to industry and investment, encouraging the development ofthe services industry, and reducing barriers to labor mobility would result in amore balanced growth and a substantial reduction in the income gap between ruraland urban residents (Kuijs & Wang 2006, p. 1).China’s dependence on foreign companies for production and export of high-technologyproducts is also identified as an example of its “unhealthy” reliance on externaltechnologies. Companies with either whole or partial foreign ownership accounted for57 percent of China’s total exports in 2004 and 58 percent of total imports, in valueterms. Their share of national industrial outputs has increased from 2 percent in 1990 to32 percent in 2004 (Invest in China website). Foreign companies also dominate exportsof high-technology goods. In 2003, these companies accounted for approximately 80percent of China’s total high-tech exports (NRCSTD 2005).10.3.3 Strategic Factors Drive Chinese Outward FDIOutflows of FDI from China are still modest. According to UNCTAD, outflows onlyamounted to 1.8 billion dollars in 2004, or a mere 0.2 percent of total FDI outflowsworldwide, and 2.2 percent of developing countries’ outflows. Between 2001 and mid–2005, according to China Daily (2006), Chinese companies completed 103 outboundMergers and Acquisitions (M&A), most of which were in minerals, natural resourcesand communications industries.Chinese FDI outflows have been driven primarily by China’s highly raw-material andenergy-intensive economic growth and, consequently, by the need to secure access tonatural resources and energy (see Zweig & Jianhai 2005 and Financial Express 2004).As a result, some of China’s FDI outflows in recent years have been directed at countriesrich in natural resources, (e.g. Africa, Latin America, Central Asia and the MiddleEast). Examples are Sinopec’s one billion dollar deal with Brazil to build a gas pipeline,Shanghai Baosteel’s 1.4 billion dollar joint venture with the Brazilian steel pro-241
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ITPS, Swedish Institute For Growth
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The Swedish Institute for Growth Po
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