The Internationalization of Corporate R&D

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THE INTERNATIONALIZATION OF CORPORATE R&DSummaryThe following quote by an executive with a long business experience in China succinctlysummarizes the development of foreign companies’ R&D in China: “Initially,firms located R&D here because they had to. But once they were here, theyrealized how attractive it was for them to do R&D in China.”Thus, government policy of “encouraging” or effectively demanding technologytransfer in return for access to the Chinese market played a key role in initiallygetting companies to establish R&D centers in China. This seemingly “bitter pill”was sweetened with generous tax and other incentives for foreign companies settingup R&D operations in China. Government policy still plays an important rolein some industries. However in recent years, the importance of government policyhas waned. It has been replaced by a combination of factors (e.g. proximity to productionfacilities, a large market, and human capital) that constitute a strong argumentin favor of foreign companies’ establishing R&D in China.Several aspects make China a unique case. First, low production costs and the domesticmarket coincide to make China a highly attractive location for production.Second, and in addition to these two factors, China offers a competitively pricedand abundant pool of highly skilled labor. The combination of these factors meansthat companies, or industries, can either locate or have access to the entire valuechain of their product in one, albeit large, country. According to several interviewees,it is the combination of these factors that makes China attractive for purchasing,production, distribution and R&D.10.4.7 Limited R&D Activities by Chinese Companies AbroadChinese companies have relatively limited international R&D activities. Maximilianvon Zedtwitz (2005), examined eleven Chinese companies – all leaders in their industryin China – and found that six of them operated international R&D units. SomeChinese companies acquire international R&D centers through the purchase offoreign companies. Examples are computer manufacturer Lenovo, which “acquired”R&D centers outside China through purchase of IBM’s PC business, and consumerelectronics producer TCL through its merger with French counterpart Thomson. Afew Chinese companies have set up their own R&D centers abroad. Thus,telecommunications companies ZTE and Huawei recently established R&D centersin the Stockholm region.The most likely reason for Chinese companies to set up R&D in developed countriesis to source foreign technology. In contrast, when Chinese companies establish R&Dcenters in developing countries, the main reason seems to be market-oriented R&D(von Zedtwitz 2005). Furthermore, a number of large Chinese companies are still254
THE INTERNATIONALIZATION OF CORPORATE R&Dstate-owned or controlled, and therefore likely to heed the Chinese government’srecent appeal to Chinese companies to “go global” with R&D.The fact that Chinese companies’ R&D activities abroad are still limited can be explainedby the fact that Chinese companies still invest relatively little in R&D, particularlyinnovative R&D. According to a recent article in China Daily (2005a), whilecompanies in developed economies allocate on average approximately 5 percent ofannual revenues to R&D, in China the average rate is around 1 percent. For example,telecommunications companies Huawei and ZTE each spend 10 percent of their annualrevenue on R&D. By comparison, Ericsson and Nokia spend 16 and 13 percent respectivelyof net sales on R&D, according to annual reports.10.5 Conclusions10.5.1 Main FindingsIn recent years, foreign companies’ R&D operations in China have increaseddramatically. We estimate that currently there are at least 250 R&D centers establishedby foreign companies in China. Initial R&D activities by foreign companies inChina consisted almost exclusively of activities aimed at developing or adaptingproducts to the Chinese market (adaptive R&D). However, in recent years we arewitnessing a strong emerging trend of foreign companies locating innovative R&Doperations in China, that is, activities which are not just aimed at meeting Chineserequirements for technology transfer or adapting products to the Chinese market. Weestimate that currently around 30 multinational companies have up to 60 innovativeR&D centers in China, primarily in the Beijing and Shanghai areas.The tendency to set up innovative R&D centers is heavily concentrated in selectedindustries, such as telecommunications, software and personal computers; in othersectors, such as life sciences, there is no similar discernible trend.A large and rapidly growing internal market, combined with an increasingly attractivehuman capital base, make a powerful case for establishing R&D in China. In addition,a significant share of foreign companies’ R&D activities remains driven by governmentincentives or “persuasion tactics.” However, there are some signs that this driver offoreign R&D activities might become less important over time.Weak IPR protection is often mentioned as deterring foreign companies from locatingR&D in China. Several of the people interviewed for this study expected this issue tobe addressed by the Chinese authorities in a foreseeable future. The executives did notlist this as a huge problem and were cautiously optimistic that the issue would resolveitself over time, as Chinese companies become more innovative and thus acquire stakein good IPR laws. Also, improved IPR protection could contribute considerably to255
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ITPS, Swedish Institute For Growth
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The Swedish Institute for Growth Po
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