The Internationalization of Corporate R&D

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THE INTERNATIONALIZATION OF CORPORATE R&DAs an example, China used its market as a leverage for requiring technology transferwhen automobile companies competed for licenses to establish joint venture establishmentsin China in late 1990s (at a time when it was speculated that this would be thelast license to be issued for long time) (Gassmann & Han 2004).Furthermore, companies are establishing R&D operations in China because significanttax rebates and other financial incentives are being offered. In addition to preferentialpolicies for FDI in general, a number of policies are targeted at attracting technologyintensiveactivities of foreign companies. 17 In April 2000, the Ministry of ExternalTrade and Economic Cooperation (METEC) passed a regulation which offered preferentialtreatment for foreign R&D labs (von Zedtwitz 2004). Science parks and hightechdevelopment zones advertise tax rebates and other benefits on their websites forcompanies willing to establish R&D activities on their premises. 18 Examples of thepolicies targeting foreign technology-intensive activities are exemptions from customsduties and VAT on the import of equipment and technologies for self-use. Gains fromtechnology transfer activities can be exempt from business and enterprise income taxes.Some R&D and wage expenses can be used to offset enterprise income taxes.Some of China’s policies are argued to be in conflict with WTO rules. However, thereare currently no signs that China intends to phase out preferential policies for attractingforeign R&D. 19Challenges of Locating R&D to ChinaWe have identified three major driving forces explaining the recent increaseforeign companies’ R&D activities in China. However, companies also experiencea number of challenges to establishing R&D in China. Gassmann & Han (2004)identified a number of barriers that foreign companies face when managing R&Din China. They categorized these barriers as either stemming from complexity,unpredictability, or a combination of both. Examples of barriers experienced bycompanies within their organization include management and communicationdifficulties due to language and cultural gaps, low individual initiative, lack ofinnovative thinking among the local R&D staff, and high employee turnover rates.17 Preferential FDI policies include low tax rates or tax exemptions on VAT, corporate taxes and income taxes,exemptions from import tariffs on production inputs imported by Foreign-Invested Enterprises (FIEs), favorableland use rights, administrative support, subsidized office rents, etc (see for example HKTDC 2004, and Hou2004). Foreign companies establishing themselves in China are exempt from corporate income tax for the firsttwo years that they make a profit. After that, they are subject to 15 percent corporate income tax on average,which is much less than the normal rate for Chinese companies of 33 percent (Prasad & Wei 2005).18 See for example Jiangsu Province Taixing Economic Development Zone,www.chempark.com.cn/enwhh/htm/1_guide09.htm, or Xi’an High-Tech Development Zone,www.cbw.com/business/invest/xian/policies.htm.19 This is exemplified by the “Opinions of Shanghai Municipality on Encouraging Overseas Investment in theEstablishment of Research and Development Institutions,” formulated and adopted as recently as 2003/04,see w2.tdctrade.com/report/reg/reg_040102.htm.252
THE INTERNATIONALIZATION OF CORPORATE R&DOutside the organization, companies identify bureaucracy and insufficientenforcement of intellectual property rights as important obstacles to operatingR&D activities in China.Political and economic stability and rule of law play an important role when companiesdecide whether to locate production in a given country. Arguably, expectations of a favorablepolitical climate, and of a lasting investment-friendly environment, become evenmore important when considering whether to set up R&D operations in a country. This isexplained by the fact that R&D operations are considered a very sensitive function andbecause the establishment of R&D operations can be seen as an undertaking which requiresa fairly long-term planning horizon. Overall, China has been considered for quitesome time to have an environment that is conducive to FDI. The recent elimination ofrestrictions on the establishment of foreign-owned companies and China’s entry into theWTO are some factors considered to have further enhanced China’s attractiveness forforeign R&D operations. However, a few factors could change this situation.First, there could be a change in China’s policy for attracting FDI in general and foreignR&D in particular. As mentioned above, criticism of the government’s policy ofattracting foreign R&D is growing. Critics are questioning to what extent there arepositive spillovers from foreign R&D centers to domestic companies and researchinstitutions. They claim that foreign research centers may actually be starving domesticcompanies of the best scientists and engineers, and criticize the government for puttingtoo much emphasis on attracting foreign technologies, rather than promoting thegrowth of domestic technologies, (see for example Cao 2004 or Yuan 2006). The government’srecent emphasis of the need to strengthen “independent innovation,” to reduceChina’s dependence on foreign technology and innovation is a reflection of thisemerging trend. Second, political instability may either slow down the pace of economicgrowth or reduce the attractiveness of China as a market or business environment.Recently, there have been signs of growing political unrest, attributed to theincreasing inequalities between those who benefit from China’s economic developmentand those who are left out. A third potential threat to China’s economy is the poor conditionof its banking system, and its large number of bad loans.An issue often mentioned as an important factor deterring foreign companies fromlocating R&D in China, is weak protection of intellectual property rights (IPR). In ourinterviews, we found no clear consensus on this. While some interviewees listed fear ofpiracy as a clear concern, others claimed that this was not a significant obstacle. Someexecutives also expressed that they were optimistic that the issue of IPR would resolveitself over time, as Chinese companies become more innovative and thus acquire astake in good IPR laws.253
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The Swedish Institute for Growth Po
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