Innovation in China – some evidence from
foreign R&D centres in Shanghai
Seamus Grimes
Department of Geography/ Centre for Innovation and Structural
Change,
National University of Ireland, Galway
Debin Du
Department of Urban and Regional Economics
East China Normal University, Shanghai
Decentralisation of R&D by ‘globalising’
corporations
• MNCs becoming global corporations and
decentralising activities (including some
HQ and also R&D) outside home countries
• Changing geography of market growth –
emergence of China and India
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Multinational firms, innovation and productivity
Castellani and Zanfei (2006)
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Increasing importance of asset seeking activities of MNCs – access
to local knowledge
Bridging initiatives – increasingly connect dispersed innovation
systems
Tensions within MNCs between international dispersion and
concentration of innovative activities
A shift in the literature from ‘transfer of MNC technology’ to the
process of global knowledge creation and exchange
MNCs need to combine internal networks of innovative subsidiaries
with external network of collaboration with foreign firms and
institutions
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Emerging countries
• Large, emerging countries, with significant
middle class markets, cheaper and well
educated labour and stabilising political regimes
(India, China, Brazil) no longer seen just as new
markets for old products, but as significant
locations requiring reconfigurations of the
economic geography of MNC operations.
• Not only do MNCs adapt products to local
markets – local markets also provide ideas for
new global products (Buckley, 2009).
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Booz & Company Global
Innovation 1000 (2008)
Overseas expenditure by top corporate R&D
spenders (2007)
Top 80 US
$80.1bn of $146bn
Top 50 European $51.4bn of $117bn
Top 43 Japanese $40bn of $71.6bn
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Booz & Company Global
Innovation 1000 (2008)
Share of R&D facilities outside home markets of MNCs
(2007)
From 45% in 1975 to 66% in 2005
2004-2007 MNCs increased R&D sites by 6% and staff by
22%
83% of new sites in China and India
91% of additional staff in China and India
2007: China a net importer of $24.8bn R&D from top 1000
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A new geography of knowledge?
Dieter Ernst (2009)
• Global centres of excellence in US, Japan and
the EU
• Advanced locations: Israel, Ireland, Taiwan and
Korea
• Catching-up locations: Beijing, Yangtze River
Delta, Pearl River Delta, Bangalore, Chennai,
Hyderabad and Delhi
• New Frontier: lower-tier cities in China and India,
plus Romania, Armenia, Bulgaria, Vietnam, etc
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Global Innovation Networks (GINs)
Ernst (2009)
• ‘new frontier locations’: the main attraction
– ample supply of low-cost, highly
motivated, and trainable engineers and
technicians, willing to work long hours at
low pay in a highly-structured factory
automation-type environment
• Constraints: limited exposure to modern
US style management systems
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GINs
• Will improve access for MNCs to a limited pool
of knowledge workers
• Scarce talent in an ageing world
• MNC innovation systems being opened to
outsiders in a few select areas
• Knowledge sharing the glue for GINs
• A shift from IP barriers strategies to strategies
seeking to externalise IP through GINs
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Race for FDI: EU and China
Oxelheim and Ghauri (2008)
• An UNCTAD (2005) survey of global firms on the
most attractive locations for R&D:
– China (61.8%), US (41.2%), India (29.4%), UK
(13.2%), France (8.8%), Germany (5.9%)
– Ireland and Sweden (both 1.5%)
• 2004: EU surpassed for first time by developing
world ($233/$216bn) for FDI
• 2005: China No 3 for FDI after US and UK
– Data on FDI to China needs to be interpreted
carefully
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Branstetter and Foley (2007) Facts and fallacies
about US FDI in China
NBER Working Paper 13470
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US affiliate activity in China is relatively modest and likely to remain
modest for some time
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Small scale of activity partly because of focus on local market
China = 2% of US affiliate sales (2004)
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Carry out relatively little R&D which is quite dependent on
supporting activity of parent
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China’s exports of high technology goods quite dependent on
imported components, technology and expertise
It will be many years before China is a significant exporter of
innovative goods and services
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US R&D in Asian DCs
• R&D spending in Asian developing
countries as a share of global research
expenditure of foreign affiliates of US
MNCs growing fast
• Tripled from 3.4% in 1994 to 10% in 2002
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A dynamic market with evidence of upgrading
Brandt and Thun (2009)
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Battle between domestic and foreign firms for market
Domestic firms meet the demand for lower cost products, but rising
incomes and demand for better quality eroding this advantage
Pressure on foreign firms to capture a larger share of growing
middle market segments – accelerating the localisation of China
operations
Opportunities for domestic firms
Entry at both ends of the market important for upgrading process in
China
Very different from conventional export-led model – domestic firms
able to build capabilities and move into higher value-added
segments of value chain
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A global technology power in next 10-15 years,
if….
Hu and Jefferson (2008)
• If China succeeds in fortifying market institutions
• Including its financial system
• To allow more private resources to enter risky
ventures
• And a more rigorous enforcement of IPR
• And continues to promote openness to foreign
technology and investment
• Then….
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Gupta, A K and Wang, H (2009)
Getting China and India Right
• 172. ..even fifty years from now, it is a
reasonable bet that 75 to 80 percent of the
global demand for most products and services
will be outside China.
• 173: There is no reason that the established
multinational should cede any of this market to
an aspiring champion from China or India.
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Challenges facing Chinese companies
Buckley (2009)
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Companies like Lenovo and TCL (TVs) take advantage of low
purchasing power and inefficiencies of Chinese market
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Offer cheap versions of electronic products – Chinese consumers
cannot afford higher quality foreign products
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Low profit margins – Chinese companies cannot afford necessary
R&D expenditure to create new products and brand
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Underdeveloped manufacturing and SCM skills
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Weak entrepreneurial and marketing skills
So they acquire weaker brands at higher prices as best way forward
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China’s position as a major high tech exporter
needs to be qualified (OECD, 2008)
• Generally FIFs are less R&D intensive than
domestic firms (not specific to China)
• Pronounced differentials in some sectors
contributed to a perception that technology
transfer to China and related spillovers to the
domestic economy have not met expectations
• Lack of absorptive capacity of Chinese firms
• Lack of IPR protection
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The technology gap – a national challenge
Zizhu chuangzin
• Priority recently given to ‘indigenous innovation’
• What does it mean?
• Zizhu chuangzin (independent innovation) –
worries inside MNCs re definition – worries re
drive to ‘absorb’ foreign technologies (Wilsdon
and Keeley (2007)
• Estimated that only 15% of the value of China’s
electronic and IT exports is added in China
• 50-70% of manufacturing costs of a Chinese PC
represents license fees to Microsoft and Intel
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A domestic standards regime to better capture the
economic value from technological progress
techno-nationalism?
• R&D investment in ICT sector both technology
and demand driven
• Domestic technical requirements and standards
is why Motorola, Nokia, Microsoft and Ericsson
were among the first to establish extensive R&D
activity in China
• China has become a major arena for global
competition among MNCs
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Chinese policy is technology-driven
• Despite the development of a market economy, the role
of the state in China is quite different to the West
• A top-down policy
• A strong focus on R&D as a driver of innovation and a
neglect of the importance of markets and sophisticated
customers
• Hence the gap between domestic and foreign firms
• Few spllovers from foreign firms in Shanghai related to a
lack of trust and the absence of social capital
• Corruption, IPR infringement undermine innovative
behaviour
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Foreign R&D in China – some controversial issues
(OECD, 2008)
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The number of foreign R&D organisations
The type of R&D conducted
Their importance in global R&D network
Their impact on innovative capacity of Chinese
industrial sector
• 1990s: much of the earlier R&D was more show
than substance and the result of government
initiatives
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The type of R&D performed
(OECD, 2008)
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‘doing R&D in China often seen as a way of building a market or
gaining favour with the government’ (Wilsdon and Keeley, 2007)
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Market-seeking
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Short-term adaption to market
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Overall perception: most is development-focused rather than
research
Largely targeted at Chinese market
Only a minority succeeding in integrating their R&D in China into
their global R&D network
Some selecting China as one of a few countries in global R&D
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Foreign R&D in China
Boutellier, Gassmann and Von Zedtwitz (2008)
Various sources: 2000: 34 foreign R&D units
2002 82
2007 507
(Chinese Government figures say 750)
2nd only to US for foreign R&D labs
But in 2007, the US was a net importer from top 1000 of
$108.5bn compared with China’s $24.8bn
Impressive growth of foreign R&D in China, but still
relatively small
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Rationale for offshoring R&D
(OECD, 2008)
• Initially MNCs shifted a significant part of their
manufacturing to China because of low costs
• Later they undertook related R&D activity
• More recently, they located research and
product development for the global market in
China
• Access to human resources a more important
driver than market access, adaption of products
to market or support of export-oriented
manufacturing operations
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Foreign R&D in Shanghai
MOST Survey 2006 + 2007 fieldwork
• 2004: 6.77bn RMB (USD 0.99bn)
• 22.6% of all FDI R&D in China
• 2005: 75% of Business Expenditure in
R&D (BERD) and 43% of total R&D
expenditure in Shanghai
• 2006: 9.7bn RMB (USD 1.42bn)
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MOST Survey
Shanghai 2006
• 156 R&D operations (123 centres) registered
(Shanghai Bureau of Statistics)
• 2 > 1bn RMB (USD 146.3m)
• 10 > 100m RMB (USD 14.6m)
• 14 50-100m RMB (USD 7.3m – USD14.6m)
• 48 10-50m RMB (USD 1.46m – USD7.3m)
• 53 < 10m RMB (USD 1.46m)
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MOST Survey
Shanghai 2006
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70% <100
42% <30
9 >500
4 >1000
GM Joint Venture Pan Asia 1,240 employees
GE 1,200
13,397 employed = 15% of total Shanghai R&D
labour force (11,007 scientists/engineers)
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Plans to grow
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AMD Shanghai to 400
EMC China to 500
Continental China 600 by 2011
Honeywell to 3,000
GlaxoSmithKline to 1,000 in 10 years
SAP to 1,500
2/5 of all Shanghai R&D centres are Fortune 500
companies
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R&D centres by function
MOST (2006)
• Tactical: early stage R&D centres for local production
and technical support – may evolve over time to more
significant functions
• Global/Regional Centres: 33 in Shanghai – in 7 cases
they are the largest or only global R&D centre
• Many MNCs have relocated Asia Pacific R&D from
Singapore and Japan to Shanghai (Danisco, Dow)
• Upgraded centres: SAP to SAP Research Institute
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Conclusion
• Despite the rapid growth in foreign R&D centres in China
and Shanghai, many investments are modest
• While there has been some outsourcing of tasks from
HQ to Shanghai, and some contributions to global
operations from Shanghai, the primary focus is on the
local market and the Asia Pacific region
• The Chinese market has shifted from the earlier
competition (and monopoly) between MNCs with high
margins and major contracts to a new competition for the
rapidly expanding middle market of lower priced
products and lower margins.
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Conclusion
• Many MNCs see China as a very significant
market in the future and the arena where they
must compete, not only with other MNCs, but
with a growing number of Chinese companies.
• Winning and maintaining market share in this
new market will determine for some their ability
to compete globally.
• Thus R&D investment in China is part of growing
with this new market.
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