The Internationalization of Corporate R&D

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