Over-concentration of Foreign R&D
in Beijing and Shanghai in China and
Implications for Second Tier Cities
Yifei Sun
Assistant Professor
Department of Geography
California State University Northridge
May 28-29, 2005
Acknowledgement:
Support from the National Science Foundation is
gratefully appreciated!
Also thank many MNC R&D Directors/Managers for
sharing their insights with me
Globalization of MNC
R&D: Observations

Increasing globalization of R&D
– Traditionally, developed countries are the major
origins and destinations
– Recently, China and India have become very
attractive locations

Growing Localization
– China: Beijing and Shanghai




Von Zedtwitz (2004), 199 foreign R&D establishments
Beijing:78
Shanghai: 61
Together: 139 or 69.8%
Research Questions


Why are foreign R&D establishments
so concentrated in these two cities?
What are the implications for second
tier cities in China in competition for
foreign R&D
Explaining Locations of
Foreign R&D

Rational choice model
– Internal factors
– External factors
Over-concentration in
Beijing and Shanghai?
City
Beijing
Shanghai
Top100 U
19 (19%)
8 (8%)
MOE U
22 (30.1%)
8 (11.0%)
Col. Students
212984 (5.2%)
165129 (4.0%)
City
Beijing
Shanghai
R&D Ins.
231 (5.7%)
156 (3.9%)
KeyLabs
97 (24.0%)
32 (7.9%)
Scientists
35506 (16.2%)
13450 (7.0%)
City
Beijing
Shanghai
HT Emp (000) HT Output (BY)
403 (11.6%)
148 (11.4%)
109 (3.1%)
94 (7.3%)
HT Exports (M$)
2877 (8.7%)
3010 (9.1%)
Foreign R&D in USA
State
No. Of Facilities
%
USA
701
100.00
California
188
26.82
New Jersey
67
9.56
Michigan
41
5.85
Ohio
40
5.71
North Carolina
34
4.85
Massachusetts
34
4.85
New York
33
4.71
Pennsylvania
30
4.28
Illinois
24
3.42
Connecticut
18
2.57
Texas
18
2.57
Alternative Explanation

Imitating behavioral model
– Following others
– Stochastic
– Uncertainty
– Information shortage and inaccurate
Developing Countries and
Uncertainties

Developing countries
– Under-developed market
– Shortage of quality information
– Intellectual property right protection

Uncertainties – risks
– Choosing a cautious approach:


Start with small, peripheral activities: service,
customization (Nortel Network)
Research vs. development (Lucent Technologies)
– Seeking help from local governments
– Finding the safest location
– Following the leaders
Location Decision with
Uncertainty: Choosing the
Safest Location
“Unilever was already in Shanghai in the 1930s and
it liked Shanghai: it is the most developed
commercial city in China; it leads the consumption
fashion in China; it has a relatively friendly business
environment; it also has a large pool of high-quality
labors in China. (That’s why) our R&D chose to
locate in Shanghai. Broadly speaking, Shanghai and
Beijing are the two only locations where people are
conducting high-quality research: they have the
highest concentration of high-quality labors and
universities. They also have research tradition.
Finally, our headquarters is located here, and many
facilities could be shared with our R&D facilities.”
- Interviews with Director, Unilever China
Research Center
Following the Leaders

“Since many MNCs have established similar
R&D centers in those two major cities, the
market is already mature. More foreign
enterprises are entering such markets.
Some of them do not even know the
environments well, but still choose to
establish labs there simply because many
others have done so. If so many are there,
there must be something good about them.
As such, the markets in the 1st tier cities
become overcrowded.”
– Interview with a Director of a major foreign R&D
Center in Nanjing
Advantages of Second
Tier Cities




Availability of skilled labors
Lower operation costs
Lower labor costs and mobility
More government attention
Advantages of Second Tier
Cities I: Availability of
Quality Labors

Presence of large pool of skilled labors
– Universities (Nanjing)




32 colleges and universities,
22 provide BA and above degrees.
10 among China’s top100 u.
8 included in China’s ‘211’ program
– R&D Institutes


among the 305 state Key Labs and Engineering Centers, Beijing and
Shanghai: 129
Nanjing (17), Wuhan (19), Chengdu (11), Hangzhou (11), and Xi’an
(10)
– High-tech industries


High-tech ents (2002): 28338 (China), Beijing (9567), Tianjin (1835),
Xi’an (2092), Shengyang (1333), Dalian (951)
FDI: Shanghai: US$3.6 b or 7.9%, Suzhou ($2.8 b or 6.2%), Tianjin
($2.5 b or 5.5%), and Guangzhou ($2.7 B or 5.9%), Beijing (($2.1 b
or 4.5%).
Advantages of Second Tier
Cities II: Lower Operation
Costs

Lower Operation Costs
– Cost is an important consideration of
MNCs
– However, the factor is missing in
subnational discussion
– Housing: Shanghai (6,627 yuan/m2) and
Beijing (5,052 yaun/m2) Wuhan (2,520
yuan/m2).
Advantages of Second Tier
Cities III: Labor Costs and
Mobility
• Labor cost: Shanghai per capita income
(27,406 yuan) in 2004. Wuhan or
Chengdu: 1/3 of Shanghai. In Nanjing,
60% lower
• Labor mobility and motivation: 8% (Von
Zedtiwitz) - 20% (Fortune on Lucent
Technologies)
Labor Costs I -
Interview with a
R&D manager in a Japanese Company in
Shanghai
“The living cost in Shanghai is pretty
expensive. I worked at Thailand from 2000
to 2002. Compared with Thailand, the living
cost here at Shanghai is three time of that
at Bangkok in Thailand. I though it would
be very cheap in Shanghai. It is not the
case at all, particularly in the Hongqiao
(Gubei) area.”
Labor Costs II- Interview with a R&D
manager from a Foreign R&D Center in Nanjing

“We did not consider Beijing and
Shanghai because we found that
working forces in these two cities are
too expensive and our main cost here
is human resource. Human resource is
the most important factor… The labor
cost difference between Nanjing and
Shanghai, I would say is about 30 to
50 percent. It is a huge difference!”
Labor Mobility I -
Interview with a R&D
Director from a major Chinese TeleCom company
“Nanjing people are very simple and hard working.
Generally speaking, the regional culture in Nanjing
is relatively conservative and people are not as
open as those in Shanghai. It is pretty clear in
Shanghai and Beijing people keep jumping from
enterprise to another, though we want to keep our
development team relatively stable…How to reduce
the mobility rate is a headache for those managers.
As such, those managers experience much higher
pressure in retaining their team compared to those
in Nanjing… The mobility rate in Shanghai and
Beijing is about twice of that in Nanjing. The
average mobility rate is about 6-8%, where it is
about 3-4% in Nanjing and as high as 9 or10% in
Shanghai and Beijing.”
Labor Mobility II
Interview with a Chief engineer in a Taiwanese R&D
Center in Nanjing
-
“Beijing and Shanghai are different. Shanghai is the
financial center and Beijing is the political center.
..Maybe such cities are too big and costs are very
high for R&D operations. Also it is possible that life
tempo is too fast for engineers. Engineers have
their own unique identity: relatively they like quiet
places and a more intellectual environment …From
the perspective of individual workers, Nanjing is
better for R&D. None of my classmates in Shanghai
are doing R&D: they are either working on
business, finance and others. Some have their own
businesses. I feel that Nanjing is better for R&D.
We will expand our R&D facility in Nanjing and the
new R&D center is under construction in the west
Nanjing.”
Labor III –
Interview with a R&D
Director in Nanjing
“People are interacting with the social
environment and the local context has
strong impacts on personal behaviors. For
example, a lot more people in Nanjing are
willing to work overtime than those in
Shanghai. If Nanjing has three people
willing to work over time, Shanghai may just
have two people willing to do so. In
Nanjing, people volunteer to work overtime
while many in Shanghai are persuaded to
work overtime by their supervisors.”
Advantages of Second Tier
Cities IV: More Eager Local
Government

“Shanghai and Beijing already have
many MNCs establish R&D centers
there, and they do not care so much
any more. Their support and
preferential policies will not be as
attractive as those from the 2nd tier
cities.” – Interview with a R&D Director at
Nanjing

Intel: Chengdu and Shanghai
Weaknesses of Second
Tier Cities



Image: less developed – imagined
Infrastructure: international flights
Attracting of international talents
(management) and non-local talents
Implications for Second
Tier Cities

Win the trust of MNCs
– Image building

what is important is not just who you are, perhaps
more important is what other people think who you are
– Building a business friendly environment:



be friendly to current MNCs, as well as domestic
companies
Improve the efficiency of government operations
Win the attention of talents
– Improve urban planning and construction, Urban
amenities
Implications for MNCs


Broaden their horizons in looking for
suitable sites for R&D facilities in China,
as many cities in China have
advantages in comparison to Beijing
and Shanghai
Get attention from top city officials