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
Presented to Royal Geographical Society/Institute of British
Geographers Annual Conference 26-28 August,2009, Manchester
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Decentralisation of R&D by ‘globalising’
corporations
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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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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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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
Small scale of activity partly because of focus on local market
China = 2% of US affiliate sales (2004)
Carry out relatively little R&D which is quite dependent on
supporting activity of parent
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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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
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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?
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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
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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)
Market-seeking
Short-term adaption to market
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)
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Initially MNEs 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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Below is the chart of GDP by all major cities in China for the year of 2007:
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Foreign R&D in Shanghai
MOST Survey 2006 + 2007 fieldwork
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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
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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)
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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
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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
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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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