Technology Analysis & Strategic Management
Vol. 17, No. 3, 317 –337, September 2005
Managing Global Research and
Development in China: Patterns of
R&D Configuration and Evolution
JIATAO LI & DEBORAH R. YUE
Hong Kong University of Science and Technology
ABSTRACT The growing internationalization of R&D activities challenges multinational
corporations (MNCs) to formulate technology strategies and manage increasingly diffuse and
diverse networks of R&D laboratories and alliances in the context of disparate national
institutions. This paper examines the evolutionary processes of MNCs’ R&D strategies in China in
terms of two principal dimensions, i.e. geographic dispersion and functional focus. Based on a
study of 378 international R&D centers and alliances established in China over the 1995– 2001
period, we investigate the evolution of managing international R&D configurations in an
emerging economy. The model is further illustrated with key findings from case studies of three
leading high-tech MNCs in managing their global R&D operations in China over 1996– 2004,
specifically Fujitsu, Motorola and Nokia. This study contributes to the existing literature by
exploring the globalization of R&D through foreign centers of scientific and technological
excellence, which enables MNCs to innovate closer to their product markets and manufacturing
facilities in emerging markets.
1.
Introduction
Multinational corporations (MNCs) have been increasingly internationalizing their
research and development (R&D) investments through overseas R&D centers and
alliances with local companies and universities to: (1) take advantage of host country
scientific and technological inputs and (2) respond to local market needs and innovate
closer to their product markets and manufacturing facilities.1 Globally dispersed R&D
operations may provide firms with competitive advantages not available in singlecountry centralized R&D operations.2 At the same time, the growing internationalization
of R&D activities challenges MNCs to formulate technology strategies and manage
increasingly diffuse and diverse networks of R&D laboratories and alliances in the
context of disparate national institutions.3
Correspondence Address: J. T. Li, Department of Management of Organizations, School of Business and
Management, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong, China.
Tel: þ852-2358-7757; Fax: þ852-2335-5325; Email: mnjtli@ust.hk
0953-7325 Print=1465-3990 Online=05=030317–21 # 2005 Taylor & Francis
DOI: 10.1080=09537320500211367
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J. Li & D. R. Yue
This paper focuses on managing global R&D in China. Being the world’s largest
emerging economy and the preferred destination of foreign direct investment (FDI) in
recent years, China plays an important role in the international strategies of many
MNCs. Leading MNCs are increasingly setting up R&D operations in China.4 For
example, over 300 foreign R&D centers and alliances have been established in China
since 1995.5 These research facilities are part of large-scale foreign investments that
leading MNCs have established in China in recent years. Recently, the OECD ranked
China as the third most R&D intensive country in the world.6 The total R&D spending
in China reached nearly US $60 billion in 2001, behind only the USA and Japan, and
ahead of Germany.7 Undoubtedly, China’s rapid economic growth has rendered it the
world’s largest emerging market. It is thus not surprising that foreign R&D centers
are focusing heavily on problems particular to the local market, e.g. Chinese-language
computer use. At the same time, some of the research centers are devoted to basic research
as opposed to product development, thus contributing knowledge to MNCs’ global
operations8 and helping to reinforce or revitalize their core technologies.9
While recognizing the potential benefits of globalizing R&D, many MNCs do not have
in place a useful means to effectively implement international R&D processes.10 Therefore, the benefits of global R&D could be underestimated and insufficiently exploited
owing to concerns about high execution costs and low project efficiency. The challenges
imposed by the physical distance among R&D units, as well as coordination and control
between R&D units and corporate headquarters, could prevent the exploitation of potential
synergy effects. Many MNCs have started to search for leaner and more effective ways of
managing their international portfolios of innovation activities as a result of the overly
complex and unmanageable organizational architectures associated with distributed
R&D activities and globally dispersed innovation processes.11
In a recent study, von Zedtwitz and Gassmann suggest that international research and
development are subject to different location drivers.12 They identify two principal
location rationales—access to markets and access to science—as the principal determinants that lead to different patterns of international R&D management. We adapt and
extend this framework to examine the evolution and configuration of R&D operations
in terms of geographic dispersion and functional focus in a host country, an area to
which has not been paid adequate attention in the literature. The main purpose of this
paper is to examine the evolutionary processes of global R&D strategy development
and implementation by foreign MNCs in China.
The analysis is based on a new database that we have developed for international R&D
facilities established in China over the 1995– 2001 period. The study period was chosen
because international R&D investments grew rapidly in China from the mid 1990s.
Based on 378 international R&D centers and alliances established in China from 1995
to 2001, we investigate the evolution of managing R&D configurations internationally in
an emerging economy, followed by key findings from case studies of three leading
high-tech MNCs in managing their global R&D operations in China over the 1996–2004
period.
The paper is organized as follows. We first propose the theoretical background and
framework for examining the evolutionary processes of global R&D configuration in a
host country. We then explore this R&D configuration model with data on global R&D
operations in China over 1995– 2001. We follow up with detailed case studies of three
leading global high-tech companies to see how they manage their global R&D operations
Managing Global Research and Development in China
319
in China, specifically Fujitsu (electronics), Motorola (telecommunications) and Nokia
(telecommunications). The final section presents conclusions and implications for
managers.
2.
Theoretical Background
Typologies of Global R&D Activities: A Brief Review
There is a substantial amount of research on the typologies of international R&D
activities.13 Early classifications are based on both the location of R&D activities and
the intended markets of R&D results: e.g. local-for-local, local-for-global, and globalfor-global technology units.14 Increasingly, managerial aspects entered the discussion.15 Håkanson, for example, suggested that organizational structures for international
R&D went through three evolutionary stages: the centralized hub, the decentralized
federation, and the integrated network.16 A new evolutionary framework is on the rise
to explain international R&D and organizational learning by MNCs is at the core of
that explanation.17
Knowledge transfer and diffusion have been argued as major management challenges in
international R&D contexts. Kuemmerle and Chiesa suggested models of R&D organization that center around the knowledge creating and transferring capabilities of R&D
laboratories.18 In another paper Kuemmerle proposed a framework that categorizes FDI
in R&D into two types: home base exploiting and home base augmenting.19 Firms
establish home-base exploiting sites in order to exploit firm-specific capabilities if
this mode of exploitation offers higher payoffs than the licensing of processes or technologies to local firms. Firms establish home-base augmenting sites to add new knowledge
and skills to the firms’ home base in order to ensure long-term survival and growth.20
Chiesa (1996) recognized that in the same firm, different R&D structures are developed
for experimentation and exploitation activities.21 Both external sources of knowledge as
well as internal dispersion of R&D resources affect the resulting R&D structure.
Recently, von Zedtwitz and Gassmann (2002) suggested that international research and
development are subject to different location drivers.22 In their paper, they aimed at
disentangling different factors that have led to a specific R&D configuration for a
global company. They outlined two principal drivers that are responsible for R&D
internationalization: the quest for external science and technology, and the quest for
new markets and products. These two mechanisms further give rise to four archetypical forms of international R&D organization: ‘national treasure’, ‘market-driven’,
‘technology-driven’, and ‘global’. The four archetypes also describe the evolution of an
entire R&D organization as a whole based on the roles of its individual R&D units.
Global R&D Configuration in a Host Country: A New Model
Building on von Zedtwitz and Gassmann’s (2002) seminal work,23 we adapt and extend
this framework to examine the configuration and evolution of MNCs’ R&D operations
in a host country. There are two key dimensions underlying the design of international
innovation processes in our model: functional focus (either research oriented or development oriented) of R&D activities and geographic dispersion or concentration of R&D
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J. Li & D. R. Yue
Figure 1. Four categories of R&D configuration in a host country.
sites. These two dimensions lead to four categories of R&D configuration in a host country
(Figure 1):
1.
2.
3.
4.
Concentrated research and development;
Dispersed research and concentrated development;
Concentrated research and dispersed development;
Dispersed research and development.
This typology allows us to map the evolutionary processes of global R&D strategy
development and implementation by foreign MNCs in a host country. To the best of
our knowledge, while researchers of R&D management have developed different
taxonomies for international R&D units, none of them have focused on the configuration
and evolution of R&D activities in a host country. Therefore, patterns of R&D configuration and evolution in the FDI context warrant more research attention. Next, we
elaborate our model along the two dimensions we identify.
Functional Focus of R&D Activities: Research vs Development
The conventional role that international R&D facilities play has been in adapting products
for national or regional markets rather than undertaking fundamental research.24 However,
recent years have witnessed a new departure in that large scale MNCs are now beginning
to treat their international R&D facilities not as a series of quasi-independent units but as
one integrated whole, serving global as well as regional purposes.25 For example, many
firms locate their research centers abroad not to save costs but to gain access to emerging
technologies or scientific talents. The overseas R&D center itself may serve as a center of
excellence within the MNC’s network for particular products and technologies.26
Managing Global Research and Development in China
321
Prior research has categorized several types of R&D activities conducted by overseas
R&D centers or alliances.27 In examining the growth of international R&D operations in
a host country, one important question is the objectives of R&D investments in terms of
a research or development orientation.28 Following previous research,29 this paper classifies international R&D investments into two types: research-oriented vs developmentoriented.
Foreign research-oriented and development-oriented activities possess distinct
characteristics. Development-oriented activities are driven by demand-related factors in
motivating FDI in R&D, as market conditions abroad may make it necessary or
advantageous to adapt products (and/or processes) to local market characteristics.
Development-oriented activities usually are exploitation-oriented in the sense that existing
products and technologies are customized to satisfy local market needs.30 By contrast,
research-oriented activities are driven by science and technology or supply-related
factors in motivating FDI in R&D, as supply conditions in the market of local engineers
and technical knowledge may in some foreign countries be favorable. Foreign firms are
induced to set up local research establishments to tap into the local scientific infrastructure,
in terms of the labor market for scientists and engineers, privileged access to local universities and research institutes, and so on.
Research-oriented activities face higher costs and risks because of the higher degree of
exploration—the search for and development of new technical ideas, products, and
processes. March argued that exploration suffers the costs of experimentation without
gaining many of its benefits.31 Foreign research-oriented activity can be regarded as a
type of home-based augmenting activity whereas foreign development-oriented activity
is a counterpart of home-base exploiting activity. Home-based exploiting activity seeks
to exploit advantages created at the firm’s home-base location, whereas home-based
augmenting activity contributes new knowledge and skills to the firm’s home base in
order to enhance the firm’s long-term growth and survival.32
Research-oriented and development-oriented activities are clearly differentiated by
foreign investors. For example, Microsoft set up a development center to develop technologies for local markets such as Chinese-language and user interface technologies. At the
same time, it also set up Microsoft Research China (MSR China), whose direction is
to research next-generation information-processing technologies, with a focus on the
evolution of technologies in the next decade.33
Geographic Location of R&D Sites: Concentration vs Dispersion
Location is one of the key factors affecting international R&D investment decisions.34 The
decision about where to establish new R&D units in a host country hinges on localized
R&D-specific factors such as the quality of inputs at the new site (through tapping local
talent, engaging in local scientific cooperation, etc.), the quality of expected outputs
(cooperation with local customers, local development, market proximity, etc.), and the
general operational efficiency (critical mass, project hand-over, cost issues, etc.) of this
R&D unit.35 The decision is also affected by localized R&D external factors, such as
tax optimization, reliability and stability of the local political and social systems, and
image enhancement.36
Location factors and overseas determinants have been studied as drivers for R&D
decentralization.37 A number of researchers have examined location characteristics of
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J. Li & D. R. Yue
R&D sites at the local level.38 Generally, these researchers have found that laboratories are
most likely to be established close to existing firm facilities or proximate to an institution
that creates externalities which the investing firm hopes to capture. For example, Asakawa
found that all sites sought to develop external linkages and that the number of external linkages depended on the degree of autonomy the laboratory had from the firm’s home
base.39
However, the literature so far has not paid adequate attention to the location configuration of R&D activities in a host country. Though it is prima facie efficient to carry
out research and development in one location, should both activities be located in one
place? In addition, because the two types of activities are subject to different location drivers, how dispersed or concentrated should the locations of various R&D units
be in a host country? Each MNC will have its own considerations concerning the pros
and cons of dispersion vs concentration, which may hinge on firm-specific and/or
environment-specific characteristics.
Many emerging economies are featured by diverse conditions and heterogeneous
policies among different regions.40 For R&D investments, the supply of skilled and welltrained research personnel such as scientists and engineers is critical. Leading local universities and research institutes offer these technical talents, which are attractive to foreign
investors. In China, the leading universities and research institutes are located in major
metropolitan cities, particularly in Beijing, the nation’s capital, and Shanghai, the largest
commercial city. Infrastructural support and investment incentives in these areas offer
reduced operation risks as well as enhanced efficiency and returns for foreign companies.
In this study, we concentrate especially on Beijing as the definitional location of
concentration vs dispersion. Beijing, primarily with its wealth of talent, has attracted a
growing number of MNCs since China’s announcement of its ‘opening’ policy. Among
them are leading global companies such as Fujitsu, IBM, Intel, Lucent, Microsoft,
Motorola, Nokia and Nortel, which all have R&D facilities there, and many more
MNCs are on their way. For instance, Microsoft revealed that it was the large number
of talented graduates that have attracted the company to launch one of its four international
research centers in Beijing. The president of one of NEC’s affiliates in Beijing also said
that, ‘Beijing is the only place in China where we can get large numbers of very talented
engineers’.41
3.
Research Method and Data Sample
Our study is based on database research on the overall trend of foreign R&D investments
in China, detailed case studies of three MNCs’ R&D activities in China, and semistructured field interviews with R&D directors. We collected different types of data in
each research step, and the multiple data-collection methods were used to ensure the
quality and accuracy of subsequent data analysis. First, to delineate a general picture on
the growth of MNCs’ global R&D activities in China, we developed our database from
four data sources: China Business Review, Business China, Nexis-Lexis and Proquest
databases. China Business Review is a major bimonthly trade magazine published by
the US – China Business Council, an independent business association headquartered in
Washington D.C. The data source has been widely used by other international business
researchers.42 Business China is a fortnightly magazine reporting foreign investments
and operations in China. Lexis-Nexis and Proquest databases include news from
Managing Global Research and Development in China
323
international newspapers, news wires, and newsletters. The information from the four data
sources was crosschecked. The data show that over the 1995– 2001 period, 378 cases of
international R&D activities have been carried out in China, including 326 R&D alliances
and 52 wholly owned R&D centers. In this study, we define international R&D alliances in
China quite broadly: they can be established in China by foreign and local partners or only
by foreign partners without local partners. They include cooperation in research projects,
joint product developments, R&D joint ventures, and R&D consortia. R&D alliances
excluded vertical supplier partnerships and one-way technology licensing agreements,
technology support, and training agreements.43 This database provides us with an overview of the functional focus and location patterns of R&D internationalization in China.
Second, to further illustrate the evolutionary processes of MNCs’ organizational
configurations in R&D activities, we chose individual firms as our unit of analysis, and
selected three high-tech multinational companies from different home countries to
examine the different evolutionary patterns of their R&D strategies in China, namely
Fujitsu, Motorola and Nokia. We first present their profiles and then examine their functional focus and location preferences over time. Finally, we conducted semi-structured
interviews with six R&D directors and senior country managers of the three studied
firms. The insights provided by them generally confirmed our research findings.
Trends of Global R&D Activities in China
MNCs are increasingly setting up R&D operations including joint ventures, cooperative
alliances and wholly owned centers in China. For example, more than 100 foreign R&D
centers have been established in China since 1996.44 These research facilities are part of
the large-scale foreign investments that MNCs have made in China in recent years.
They are a result, in part, of Chinese policy makers’ sensitivity to the contribution that
technology makes to economic growth. They also reflect MNCs’ efforts to demonstrate
a long-term commitment to China. China is among the most important markets for
leading global companies. It is thus not surprising that foreign R&D centers are focusing
heavily on problems particular to the local market, e.g. Chinese-language computer use. At
the same time, some of the research centers are devoted to basic research as opposed to
product development, thus contributing knowledge to MNCs’ global operations.
For example, Microsoft set up its fundamental research facility in Beijing in 1998 with US
$80 million. Microsoft Research China (MSR China) is developing Chinese-language and
user interface technologies, and next-generation multimedia and Chinese PC technologies.45
One motivation for setting up such a facility in China was to recognize China’s talents. MSR
China employs a large number of Chinese scientists and researchers. Aside from its basic
research facility, Microsoft operates a more product-oriented R&D center, also in Beijing.
While the R&D center works on product development, MSR China engages in fundamental
research, the products of which may take five to ten years to reach the market.46
Other technology companies are also working on advanced research projects in China,
some with similar goals to Microsoft’s with China-specific applications at the forefront
and the global market not far behind. For example, Motorola has invested US $218 million
in 18 R&D centers in China, which together employ over 1000 researchers. Lucent
Technologies set up two Bell Labs R&D facilities in China in 1997 to work on telecommunications hardware and software infrastructure as well as product development, with
a particular emphasis on China. Intel also committed US $50 million over five years to its
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J. Li & D. R. Yue
Intel China Research Center, which conducts fundamental research on Internet and information technology problems, including speech recognition and other software. In addition,
Intel has promoted science education in China through a number of cooperative programs.
There are several reasons for MNCs to conduct R&D activities in China. First, the
growth of international R&D investments in China is part of a global trend in MNCs’
transnational operations. Since 1990s, MNCs have extended the focus of their overseas
investments from traditional manufacturing to knowledge-based services. Setting up international R&D facilities or alliances has become an important element of MNCs’ global
strategy. Locating R&D activities in China allows MNCs to adapt their products or services and respond to the local market needs quickly.
Second, China’s workforce is another key factor for MNCs to undertake R&D activities
in China. China offers one of the largest pools of human resources for conducting R&D: in
1999, there were 2.4 million people engaged in scientific and technological activities,
including 1.4 million scientists and engineers.47 The Chinese government estimates that
over 2500 PhDs, 20,000 individuals with master’s degrees, and 3000 other overseas students have returned to China. The fairly low cost of China’s skilled labor also motivates
MNCs to expand R&D activities in this burgeoning economy.
Third, China’s long-term development policy in science and technology (S&T) aims to
enhance the technological capability of Chinese companies, making international R&D
collaborations and alliances feasible. China had granted about 250,000 patents to domestic
or overseas holders from 1996 to 2000.48 In 2000, US $11 billion was spent on research
and development, amounting to 1% of GDP. It represents an increase in R&D expenditures of 150% over 1995’s level of US $4.2 billion.49 China continues to target emerging
technologies where it has strong basic science capabilities and where benefits cut across
sectors. It is investing heavily in advanced materials, microelectronics, biotechnology,
information technologies, industrial automation, and energy sectors. China’s development
of a system of peer-reviewed, merit-based competitive funding for basic research and for
evaluating S&T results has the potential to stimulate more innovative and world class
research efforts at China’s universities and research institutes.
Fourth, China has enacted a series of preferential policies to encourage the establishment of international R&D alliances and foreign-owned R&D centers.50 For example,
foreign R&D centers in China can import certain equipment duty free, and are about
one-tenth the cost of similar facilities in the USA. China plays an active role in attracting
R&D-related FDI because R&D investments can have positive spillover effects to the host
country. Local companies benefit from the R&D activities through technology transfer,
new forms of management and outsourcing, which stimulate productivity and growth.
For example, the R&D centers of Microsoft, IBM, Lucent, Intel and others cooperate
substantially with Chinese universities and research institutes, and are staffed by highly
skilled Chinese researchers. In addition, foreign companies represent an additional
source of R&D financing at a time when public financing is limited. Therefore, China’s
specific human resource advantages and investment policies have also contributed to
the rapid growth of international R&D investments in the country.
In the section below, we provide an overview of the 378 international R&D investments
over the study period along the two dimensions we have identified, i.e. functional focus
and geographic dispersion.
Table 1 presents MNCs’ global R&D activities in China during the 1995 –2001 period.
The table displays a shifting pattern of global R&D in China from an initial location
Research
Beijing
Development
Non-Beijing
Subtotal
Beijing
Non-Beijing
Beijing
Subtotal
Subtotal
Non-Beijing
Subtotal
Year
Number
%
Number
%
Number
%
Number
%
Number
%
Number
%
Number
%
Number
%
Total
Number
1995
1996
1997
1998
1999
2000
2001
4
8
10
27
32
51
55
21
18
14
20
16
16
15
6
8
10
19
31
52
66
32
18
14
14
15
16
17
10
16
20
46
63
103
121
53
36
28
34
31
32
32
6
16
28
48
71
100
116
32
36
39
36
35
31
31
3
12
24
40
71
115
141
16
27
33
30
35
36
37
9
28
52
88
142
215
257
47
64
72
66
69
68
68
10
24
38
75
103
151
171
53
55
53
56
50
47
45
9
20
34
59
102
167
207
47
45
47
44
50
53
55
19
44
72
134
205
318
378
Managing Global Research and Development in China
Table 1. Global R&D activities in China, 1995– 2001: distribution by functional focus and geographic dispersion
325
326
J. Li & D. R. Yue
concentration in Beijing to a more dispersed configuration in the later period. This evolution pattern is expected. When making R&D investments, MNCs would first select the
location that is most attractive in terms of research infrastructure and skilled human
resources. As the intellectual home for many of China’s most prestigious universities
and research institutes, Beijing was the logical location choice for R&D investment.
Over time, as MNCs gain more host country R&D experiences, they tend to expand
beyond the central base to more dispersed locations, to get closer to regional markets
as well as sources of talents in these regions. This pattern is further supported by
the increased investments in development-oriented activities over the study period
(Figure 2). In the investigation of different location drivers of R&D internationalization,
Zedtwitz and Gassmann found that development tends to be geographically dispersed
while research tends to be concentrated in only a few regions.51 This pattern is largely
confirmed by our findings in the Chinese context.
Three Cases
In this section, we examine closely the R&D strategies of three MNCs that invest actively
in the Chinese market, i.e. Fujitsu, Motorola and Nokia. Table 2 presents their company
profiles. We selected these three companies based upon their different national origins
and R&D investment histories in China. Table 3 further presents their global R&D
activities in China along the two dimensions we study, i.e. functional focus and geographic
dispersion, over the 1996 –2004 period. We collected case data on the R&D investments
of these three companies from company records and field interviews in Beijing with some
of the R&D directors at these firms.
Figure 2. Global R&D activities in China. (RB: Research/Beijing; RNB: Research/Non-Beijing;
DB: Development/Beijing; DNB: Development/Non-Beijing)
Managing Global Research and Development in China
327
Table 2. Summary of company profiles for case studies
Company
Fujitsu
Study period
National origin
Industry type
Year of first FDI
entry in China
Year of first R&D
establishment
Location of major
R&D establishment
Motorola
Nokia
1998– 2004
Japan
electronics
1986
1996– 2004
United States
telecommunications
1989
1998– 2004
Finland
telecommunications
1994
1998
1999
1998
Beijing
19 research centers and
labs across China
Beijing, Hangzhou
1. Fujitsu
Company profile. Fujitsu, based in Japan, is one of the largest providers of customerfocused information technology and communications solutions for the global marketplace.
The company has a subsidiary called Fujitsu Laboratories, which has set up a large number
of R&D centers in the USA, Europe and China. The Fujitsu Research and Development
Center in Beijing was established as a wholly owned subsidiary in October 1998 and is
Fujitsu’s largest overseas research center outside of Japan. Its research focuses on nextgeneration mobile communications systems, information retrieval systems, electronic
mail systems, semiconductors and materials for the global market, as well as application
software and Chinese character processing. Fujitsu’s R&D center has already cooperated
with prestigious universities such as Peking and Tsinghua Universities in Beijing in
various research activities, and plans to expand the scope of this cooperation in the near
future.
Evolutionary processes of R&D strategies. As shown in Table 3, Fujitsu has concentrated its research activities in Beijing throughout our study period and demonstrated an
increasing preference for locating research-oriented projects in the capital city. Fujitsu’s
strategy is to locate its R&D centers in areas where research resources (such as talent,
infrastructure, and incentives) are attractive. Furthermore, the company considers
conducting R&D in growing technology hubs an essential part of its internationalization
strategy. Table 3 also suggests that Fujitsu’s development activities in China were mainly
carried out in Beijing initially, but began to expand into other areas after 2000. Therefore,
Fujitsu’s R&D configuration strategies in China exhibit an evolutionary trend from
‘concentrated research and development’ (cell I in Figure 1) to ‘concentrated research
and dispersed development’ (cell III in Figure 1). Figure 3 illustrates this evolution path.
2. Motorola
Company profile. Motorola, based in the USA, is a leading global company in wireless, broadband and automotive communications technologies and embedded electronic
products. It has a multitude of foreign R&D centers around the world including 18
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J. Li & D. R. Yue
Table 3. Global R&D activities of three studied MNCs in China, 1996– 2004: functional focus and geographic dispersion
Research
Beijing
Development
Non-Beijing
Subtotal
Beijing
Non-Beijing
Beijing
Subtotal
Subtotal
Non-Beijing
Subtotal
%
Number
%
Number
%
Number
%
Total
Number
0
1
3
4
0
33
50
40
1
2
4
5
50
67
67
50
2
2
3
6
100
67
50
60
0
1
3
4
0
33
50
40
2
3
6
10
2
2
4
6
7
Motorola
67
0
50
1
25
8
26
9
26
11
0
25
50
39
41
2
3
12
15
18
67
75
75
65
67
3
3
6
9
11
100
75
38
39
41
0
1
10
14
16
0
25
63
61
59
3
4
16
23
27
0
5
6
7
Nokia
0
56
46
50
0
22
23
21
0
7
9
10
0
78
69
71
1
7
8
9
100
78
62
64
0
2
5
5
0
22
38
36
1
9
13
14
Year
Number
%
Number
%
Number
%
Number
%
Number
1998
2000
2002
2004
1
1
2
5
50
33
33
50
0
0
0
0
0
0
0
0
1
1
2
5
50
33
33
50
1
1
1
1
Fujitsu
50
33
17
10
1996
1998
2000
2002
2004
1
1
2
3
4
33
25
13
13
15
0
0
2
5
5
0
0
13
22
19
1
1
4
8
9
33
25
25
35
33
1998
2000
2002
2004
1
2
2
2
100
22
15
14
0
0
2
2
0
0
15
14
1
2
4
4
100
22
31
29
0
2
3
3
Managing Global Research and Development in China
329
Figure 3. Fujitsu’s global R&D activities in China. (For key, see Figure 2 caption.)
research centers and laboratories in China, collectively known as the Motorola China
Research and Development Institute. The Institute was founded in Beijing in November
1999. It is committed to promoting Motorola’s long-term success in China through technological development and innovation. With an investment of US $218 million, the Institute administers over 1000 researchers in China. In addition, Motorola is working on
several design projects with leading Chinese universities. Motorola has been one of the
largest foreign investors in China, reiterating its long-standing commitment to the
Chinese market.
Evolutionary processes of R&D strategies. As shown in Table 3, Motorola has been
escalating its investment in China throughout the study period. Its R&D activities first displayed a shifting pattern from ‘concentrated research and development’ (cell I in Figure 1)
to ‘concentrated research and dispersed development’ (cell III in Figure 1), as with Fujitsu.
Then its research activities followed the expansion momentum, exhibiting an evolutionary
trend from ‘concentrated research and dispersed development’ (cell III in Figure 1) to
‘dispersed research and development’ (cell IV in Figure 1). Specifically, Figure 4 suggests
that Motorola’s development activities in areas outside of Beijing began to outweigh those
that were conducted in Beijing from 1999, while its research activities began to show a
similar pattern since 2000. This growth pattern echoes the general trend we found
based on our full sample concerning MNCs’ global R&D activities in China, and
demonstrates that it is also the case for Motorola that development-oriented geographic
expansion precedes research-oriented expansion in the Chinese market.
The pattern of Motorola’s R&D growth strategy in China is consistent with its overall
global R&D strategy. Motorola is well known for its propensity to spread out its research
and knowledge base, as can be witnessed by its large number of R&D facilities around the
world. In China, the company has also started to target Western China, as it sees Western
330
J. Li & D. R. Yue
Figure 4. Motorola’s global R&D activities in China. (For key, see Figure 2 caption.)
China becoming one of the world’s most promising telecommunication markets. Moreover, the company is also attracted by Western China’s rich resources, abundant professionals, local governments’ cooperation, and the lower labor cost (the average
salaries of engineers can be half of those in coastal cities).
3. Nokia
Company profile. Nokia is one of the world leaders in mobile communications. The
Finnish telecommunications company, based in Helsinki, has a total of 33 R&D centers
in 11 countries worldwide. Nokia opened an R&D center in Beijing in January 1998,
focusing its research on future wireless and wireline technologies. The center serves as
a means to better adapt its products and technologies for the local Chinese market. In
recent years, the company has been focusing on the third generation (3G) mobile technologies. In 2002, Nokia opened a branch office of alliances with local companies to jointly
develop the 3G technology. It also underwent a venture with a Chinese company to enter
the CDMA handset market in China. Apart from commercial cooperation, Nokia also built
up ties with Chinese universities in order to tap into the local talents.
Evolutionary processes of R&D strategies. As shown in Table 3, Nokia seems to have
mainly focused both its research and development activities in Beijing throughout the
study period. Therefore, Nokia’s growth strategy has been consistently ‘concentrated
research and development’ (cell I in Figure 1), as also shown in Figure 5. Beijing has
served as the R&D base of Nokia’s growth strategy in China. In May 2004, Nokia
announced that it is expanding its R&D undertakings in China. The expansion includes
the launch of a Nokia postdoctoral program and the creation of a unit to promote open
standards and technology localization. It also plans to expand the scale of product
Managing Global Research and Development in China
331
Figure 5. Nokia’s global R&D activities in China. (For key, see Figure 2 caption.)
design and development for Nokia mobile phones at the Nokia Product Creation Center in
Beijing. In a further move to consolidate its role in the growing CDMA market, Nokia outlined plans to establish a CDMA R&D facility in Beijing. The new R&D facility will focus
on software support and technical expertise in CDMA technology, catering to the market
and operator-specific needs of CDMA in China. It will also serve as a center for technology transfer and local talent development. According to Nokia, 40% of its global Mobile
Phones Business Group handsets will be designed and developed in the Beijing Product
Creation Center. More recently, Nokia has begun to broaden its exposure to R&D
talents in China by establishing an R&D center in Hangzhou in East China.
4.
Discussion
In this paper, we have proposed a model of MNCs’ R&D internationalization in an
emerging economy, i.e. China. We have identified four categories of international R&D
configuration in a host country in terms of functional focus and geographic dispersion:
concentrated R&D; concentrated research and dispersed development; dispersed research
and concentrated development; and dispersed R&D. Using data on 378 international
R&D centers and alliances in China since the mid 1990s and in-depth case studies of
transnational R&D organizations, we have elaborated the evolutionary processes of
global R&D strategy development and implementation along the two dimensions we
have focused on, i.e. functional focus and geographic dispersion.
While most previous research has centered on various factors such as the conditions,
motivations or precipitating circumstances that contribute to FDI in R&D,52 we have
examined the configuration and evolution of MNCs’ R&D activities in a host country.
Therefore, at a general level, our study contributes to the emerging literature on the
organizational aspects of managing global R&D operations. Specifically, our research
332
J. Li & D. R. Yue
adds to the existing global R&D literature and provides insights for MNC managers
engaged in R&D activities in the following aspects.
Global R&D and Geography
Managing international R&D projects is inherently more difficult than managing local
projects. Differences in R&D internationalization drivers lead to a separation of individual
R&D units by geography and organization. Despite modern communication technologies,
the lack of direct face-to-face interactions inhibits the exchange of tacit knowledge, the
creation of mutual trust, and a common working culture within global R&D organization.
As von Zedtwitz and Gassmann argued,53 the definition of organizations along geographic
boundaries often neglects the different responsibilities of R&D, hence creating suboptimal utilization of limited resources and capital. Moreover, local specialization could
lead to the ‘not-invented-here’ syndrome and the compartmentalization along separate
R&D functions
Our overall analysis of 378 R&D units in China over the 1995 – 2001 period and our
detailed study of three cases reveal that research tends to concentrate in major cities
such as Beijing, while product development tends to disperse across locations in China.
The location strategy of MNCs’ R&D activities may pose both advantages and disadvantages to MNCs’ long term growth and performance. For example, Motorola tends to
spread its research sites globally. This strategy provides the company access to a huge
breadth of information and ideas, but it could be a challenge to coordinate a coherent
research agenda among many research programs (e.g. inefficiencies in overlapping
research projects). Therefore, to gain the benefits from a breadth of foreign knowledge,
the global research programs need to be well coordinated.
Global R&D and Entry Timing
In this research, by examining the evolution of global R&D configuration in a host
country, we have also addressed the timing issue of R&D foreign investments. The
inquiry of sequential FDI entry has built upon a long line of research.54 For instance,
Johanson and Vahlne posit that subsequent expansion of operations in a host country
might be based on gradual acquisition and use of experiential knowledge about operations
in the host country as well as the incrementally increasing resource commitments to
foreign markets.55 Shaver et al. and Song further note that initial FDI entry provides
options or platforms for subsequent investments into the host location.56
As with other types of foreign investments, the establishment of international R&D
networks and the management of transnational R&D projects are risky endeavors.57
New R&D units are rarely set up as fully-fledged R&D centers. Most of them are established as small units that have to demonstrate their viability first. In the cases for which
we obtained historical data on individual R&D units, we observed that development
units evolve from local market support units to product development, while research
units evolve from scanning and listening posts to conduct global research by integrating
local science and engineering resources. We believe that our R&D configuration model
provides some insights on the entry timing, location choice, and evolution of global
R&D in a host market, which has not received adequate attention in the literature.
Managing Global Research and Development in China
333
We expect that advances in information and communication technologies will further
facilitate the dispersion of R&D sites globally, making it possible for companies to
draw more easily on local science and technology. At the same time, multinational
companies will establish talent pools of managers who are experienced in conducting
multi-site R&D projects. However, even with increased global presence, we do not
expect that each of these sites will become a global center of excellence within the
MNC. With multiple research and development sites in a large host country, such as
the cases that we examine for MNCs in China, we believe that it is critical for MNCs
to consider the configuration of their R&D investments as it will remain necessary to
manage the communication flows and innovation processes that are at the core of the
integrated R&D network.
Effects of MNC National Origins
The literature has suggested that American, European, and Japanese companies have shown
different patterns in the way they approach the establishment of foreign R&D operations.58
It has been suggested that Japanese companies, relative latecomers in the globalization of
R&D, tend to rely on home development, licensing and listening posts to acquire technology
before expanding R&D investments overseas. Also, Perrino and Tipping argue that
European companies have been the most aggressive in establishing foreign R&D outposts,
often through acquisitions.59 American companies have tended to support new business
opportunities by setting up overseas R&D units staffed with American researchers.
Our research echoes these findings in a specific host country context. Japanese MNCs
tend to concentrate their research units in central locations in China and are more likely to
adopt the wholly owned entry mode for these operations. For example, since 1995, Fujitsu
had been co-developing software with Nanjing University, and in January 1999 it
established a software development joint venture with the University called Nanjing
Fujitsu Nanda Software Technology Co. Ltd. Only after several years did it set up its
first R&D center in Beijing. By contrast, US and European companies tend to be more
explorative in their China R&D activities both in terms of R&D functional focus and
geographic dispersion.
We could refine the patterns of R&D internationalization for multinational companies
by discerning differences between research and development and their specific location
drivers. Recently, many American companies have assumed a ‘market-driven’ configuration because of the increasing importance of foreign markets. Japanese companies are
following suit. As a result of their relative weakness in domestic research, they have
located research units in Europe and North America. However, instead of having R&D
following production, many Japanese companies have chosen to internationalize research
first in order to prepare the ground for local development and manufacturing. This
constitutes the ‘technology-driven’ paradigm. With the relatively strong emphasis on
technology implementation in Japanese companies, cultural and social factors like tight
personal networks and narrowly meshed company interdependencies could make it
challenging to establish productive development centers outside Japan.
Similar regional attributions for ‘global’ companies are difficult to make. Only a few
Japanese companies so far have established a significant overseas presence in both
research and development. A number of European and US companies have spread
research and development evenly in major regions around the world. ‘Global’ R&D is
334
J. Li & D. R. Yue
thus less likely determined by geographic provenience but rather by maturity of an internationally dispersed R&D organization.
The Chinese Context
In this paper, we have examined the R&D operations of three MNCs in China and
suggested reasons why these companies would like to set up R&D operations in the
world’s largest emerging economy. These reasons include low cost local talent, local
market attractiveness and the need for product localization. Moreover, national technological efforts, economic liberalization and mergers and acquisitions do not seem to be
main drivers for the three companies to establish R&D operations in China. In particular,
weak enforcement of intellectual property rights law in China does not seem to be a determining factor that inhibit MNCs’ interests in investing in R&D operations that patent
research results through local institutions.
This study has implications for managers engaged in global R&D activities in China. To
ensure a successful research and development program, a high-technology MNC should
step into China quickly with its R&D operations, not only to position itself for the
growing market, but also to capture the available engineering talent and other resources.
Once captured, these resources will be of value to the company both in and outside of China.
This study also has implications for government policy makers. The rapid growth of
R&D-related FDI in China is a result, in part, of Chinese policy makers’ sensitivity to technology’s contribution to economic growth. While recognizing the positive spillover effects
of international R&D investment on the host country, policy makers should also focus on
developing the conditions necessary to maintain a thriving domestic research and development community. For example, a credible and effective intellectual property protection
regime is one of the most important conditions for international and domestic R&D investment. With China’s entry into the WTO, progress is expected in this important area.60
5.
Conclusion
In this study, we have identified and examined two key dimensions underlying the design
of international R&D configuration: functional focus (either research-oriented or development-oriented) of R&D activities, and geographic dispersion or concentration of
R&D sites. These two dimensions lead to four categories of R&D configuration in a
host country: concentrated research and development; dispersed research and concentrated
development; concentrated research and dispersed development; and dispersed R&D.
Based on this typology, we have mapped the evolutionary processes of global R&D strategy development and implementation by foreign MNCs in the world’s largest emerging
economy. Future studies could adapt and extend this framework to the study of foreign
MNCs’ global R&D configuration and evolution in other host country environments.
Acknowledgement
We gratefully acknowledge support from Hong Kong’s Research Grants Committee
through Competitive Earmarked Grants HKUST6150/02H and HKUST6196/04H, and
grant DAG03/04.BM48.
Managing Global Research and Development in China
335
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