3

Trade for Technology

This chapter analyzes the phenomenon of foreign R&D in China, and assesses its implications for foreign technology transfer. The main arguments are four-fold:

1. The Chinese economy is undergoing a fundamental transformation from an export-processing economy assembling foreign technology to a globalized economy producing indigenous innovation.

2. The past decade has witnessed a dramatic increase in the number of foreign R&D labs in China.

3. There are multiple reasons for the growth in foreign R&D labs in China, including (a) governmental regulation and laws encouraging the establishment of the labs, (b) desire by MNCs to globalize their innovation cycle and tap expertise and resources around the world, including relatively cheap pools like in China, and (c) MNCs seeking to improve their penetration of the China market by adapting their products better to local markets.

4. The presence of foreign R&D labs in China presents a potential national security problem, due to the possible transfer of foreign technology, know-how, and expertise.

Fundamental transformation: from export-processing zone to globalized economy

The growth of the Chinese economy since reform began in 1978 has been one of the fastest and largest accumulations of national wealth in world history. As reform enters its fourth decade, however, Beijing is attempting to fundamentally transform the Chinese economy from export-led to consumption-based growth, reflecting the maturing affluence of the Chinese consumer base and a desire to shift the center of gravity from foreign multinational companies to domestic firms. The reason for this desire is clearly explained by Auerswald and Branscomb:

[U]nless an economy enjoys success at every stage of the process – from invention, through innovation and economic disruption, to growth – it may lead the world in research but the final economic returns will flow to others.1

A key requirement for this transformation is the creation of an innovation base in China, including both basic and applied research and development. Over the past ten years, the Beijing government has dramatically increased expenditures on R&D, rising 0.6 percent to 1.6 percent of GDP from 1999 to 2011.2 While the PRC government is unlikely to meet its publicly articulated goal of reaching 2 percent of GDP by 2015, it has revised the future goal to 2.5 percent of GDP by 2020.3

Behind the spending, China has also significantly altered the distribution of R&D monies and the structure of R&D organizations within the country. As Liu and Lundin show,

Currently around two-thirds of the total R&D is conducted by enterprises in the business sector, compared to less than 30% in the beginning of 1990s. It demonstrates an impressive structural shift from an innovation system dominated by research institutes to an enterprise-centered innovation system during the past two decades. This change is driven by a combination of the restructuring of research institutes, the expansion of the higher education sector and the strengthening of the innovation capacity of enterprises. The ambition underlying this systematic change is to establish an innovation system, in which market mechanisms encourage applied R&D activities and stimulate rapid commercialization of R&D results in the business sector, while the basic and strategic R&D capacity building will be conducted in the research institutes and the higher education sector, with long-term government support.4

China is also producing a large number of researchers to staff these research units, ranking second in the world after the United States and ahead of Japan in number of researchers over the past decade.5

It is clear, however, that the Beijing government has concluded that its efforts to date have not been sufficient to create the required levels of innovation to compete independently in the global economy. First, spending levels on R&D are still well below that of the United States and Japan, which in 2011 spent 2.8 percent and 3.5 percent of GDP, respectively.6 Within the umbrella of R&D spending, funding for basic research dropped from 6 percent of total research expenditure in 20067 to 4.7 percent in 2009,8 compared with USA at 19 percent in 20099 and Japan at 13.7 percent in 2008.10 In terms of dollars, China’s total spending on R&D includes RMB27 billion (US$398 million) on basic research, RMB73 billion (US$10.7 billion) on applied research and RMB400 million (US$70.6 billion) on experimental research and development.11 But the problem is not simply money, but major structural impediments to a national innovation system. Serger and Widman describe at least seven major problems: (1) low level of investment in basic research, (2) low level of investment in high-tech sectors, (3) underdeveloped service sector, (4) inadequate protection of IPR, (5) underdeveloped financial and capital sectors to fund innovation, (6) high levels of academic corruption, and (7) over-focus on hard sciences versus soft sciences and lack of exchanges between hard and soft sciences.12 Perhaps the most important impediment, however, is that the national economy is still far too dependent on foreign technology, expertise, and know-how. Indeed, as Kate Walsh argues, an underlying theme of Chinese S&T reform is that “the PRC continues to need foreign technology and R&D investment but must make better use of these inputs or fall prey to foreign exploitation with innovative indigenous capacity to show for it.”13 As a result, 83 percent of China’s high-tech exports in 2009 were products from foreign companies.14

Despite China’s historical aversion to foreign dependence, it should be noted that China’s innovation strategy is being implemented in an environment of increasingly globalized research and development, driven primarily by multinational enterprises.15 As a UN report concludes,

[T]he increase of foreign R&D activities reveals a fundamental shift in the international economic geography, in which both knowledge generation and exploitation are becoming increasingly internationalized, and even mobile, and with developing countries actively competing for knowledge resources such as corporate R&D activities and highly skilled labor.16

For example, since 2004, around 75 percent of the growth in R&D workers employed by US-based multinational companies has been abroad.17 According to the Chinese Ministry of Commerce, foreign companies increased their share of total R&D expenditure in large and mid-sized manufacturing from 19.7 percent in 2002 to 27.2 percent in 2008, and hold 29 percent of all invention patents in China.18 Despite this relative dominance of R&D by foreign firms in China, there is strong evidence to suggest that MNCs are not providing a great deal of technology. Widman and Serger conclude from the data that “R&D intensity is twice as high among domestic firms than FDI firms, which suggests that FDI firms are making very cautious R&D efforts and many R&D activities are still homebased.”19 Moreover, “although domestic firms are rapidly strengthening their R&D inputs, FDI firms in China are still outperforming their Chinese competitors, in many qualitative aspects, in terms of both economic performance in general, as well as R&D output in particular.”

Of course, it was in China’s interests in the early decades of reform to attract as much foreign technology and know-how to China as possible. From Beijing’s perspective, there are at least four major reasons to seek R&D-oriented FDI: (1) to increase domestic participation in knowledge creation, accumulation and diffusion; (2) to increase domestic technological capacity; (3) to acquire foreign technologies; and (4) to generate training that benefits domestic industrial development and spur innovation by domestic industries competing with foreign players. The OECD succinctly describes the phases:

S&T industrial parks, university science parks and technology business incubators were started under the Torch program as new infrastructures to encourage industry–science relationships, and spin-offs from public research organizations (PROs) started to fill the gap; (Phase Two) The maturing of this embryonic system was accelerated in the 1990s through the combined effect of continued international opening (e.g., accession to the World Trade Organization [WTO] in 2001), improvement of corporate governance and key framework conditions for innovation (e.g., protection of intellectual property rights [IPR]), as well as further reforms of the university and public research sectors; (Phase Three) By the turn of the century, a combination of experimental national policies in special zones, bottom-up initiatives supported by regional and local authorities, and top-down systemic reforms had given birth to what could be considered an NIS under construction, in the image of the entire Chinese economy.20

While foreign dominance of R&D may have been helpful in the early phases of Chinese economic development, government plans and official statements strongly suggest that Beijing is no longer satisfied with the situation. The 2006 OECD study on Chinese innovation makes Beijing’s costs–benefits case well:

FDI projects and the operations of foreign-invested firms have also helped to improve China’s access to advanced technologies, to management practices and to a wide range of skills. Foreigninvested firms have therefore served as a major channel of technology imports. At the same time, they have located aspects of an increasingly fragmented manufacturing process in China, but have performed little technological innovation or product design in the country. Core technologies mostly remain controlled by the foreign partners in joint ventures or by company headquarters abroad. Generally speaking, foreign-invested companies are less R&D-intensive than domestic firms, although this is not specific to China. Overall, this has contributed to a perception that technology transfer to China and related spillovers to the domestic economy have not met expectations. Current patterns of specialization, a lack of absorptive capacities in Chinese firms and shortcomings in framework conditions, such as a lack of effective intellectual property rights (IPR) protection may have limited the amount of spillovers.21

As a result the Chinese government over the past ten years has undertaken a strategy “revitalizing the nation through science, technology and innovation,”22 with a particular focus on “independent innovation.”23 A series of major policy documents since 1995 has sought to build the foundation for domestic innovation.24 At the same time, the government has also sought to “source knowledge” from abroad, putting in place incentives to send Chinese students abroad for education and experience and then attract them back to China,25 and encouraging Chinese enterprises to engage in mergers and acquisitions and gain access to knowledge through overseas R&D and design labs.26 In particular, China now has internationally recognized centers of excellence, especially in IT and electronics, materials, nanotech, and life sciences.27 R&D expenditure by these types of high-tech industries tripled in just five years: from RMB 22.2 billion in 2003 to RMB 65.5 billion in 2008, growing at an average annual rate of 24.1 percent. Electronics and telecommunications accounted for 61.5 percent of all high-tech expenditure on R&D in 2008.28 Evidence of early payoffs from this strategy may also be seen in Chinese authorship of articles in peer-reviewed international science journals, rising from thirteenth place in 1994 to 1998 to second place in 2011, and poised to overtake the United States in 2013.29 There has also been a significant rise in Chinese patent applications, which increased 33.4 percent from 2010 to 2011.30 Domestic invention patents surpassed foreign-owned invention patents for the first time in 2011, comprising 50.1 percent of the total (342,466), with 49.9 percent being foreign-owned (341,697).31 Despite these impressive figures, the R&D intensity of high-tech industry in China remains much lower than that of developed countries. In 2008, the ratio of R&D expenditure to the value of gross industrial output of high-tech industries was just 1.15 percent in China. This was much lower than the 2006 ratio for the US (16.41%), the UK (11.04%), Japan (10.64%), Germany (8.34%) or the Republic of Korea (5.98%), according to the 2008 databases of the Organization for Economic Co-operation and Development (OECD) on Structural Analysis Statistics (STAN) and Analytical Business Enterprise Research and Development (2009).

More recently, the Chinese government has undertaken a strategic policy push for “indigenous innovation.” Since 2006, James McGregor and others have highlighted “Chinese policies and initiatives aimed at building ‘national champion’ companies through subsidies and preferential policies while using China’s market power to appropriate foreign technology, tweak it and create Chinese ‘indigenous innovations’ that will come back at us globally.”32 While the 2006 Mid- to Long-Range S&T Plan and other policy documents are examined in detail later in this chapter, Chinese government documents clearly highlight the potential value of encouraging the introduction of foreign R&D labs to China, especially as a platform for technology transfer to kick-start indigenous innovation. The remainder of this chapter tracks the rise of these labs, analyzes the institutional and policy means by which Beijing encourages their establishment, and assesses the potential national security implications of their activities in China. 

The rise of the foreign R&D lab

One of the most striking recent phenomena in China’s economic revolution has been the proliferation of foreign research and development (R&D) labs. In the 1980s and 1990s, foreign enterprises were almost single-mindedly focused on production and trade. The small number of R&D efforts consisted primarily of product development and adaptation to the local market.33 However, since the late 1990s, as China became the world’s workshop, there has also been a dramatic increase in the number of multinational company (MNC) R&D labs,34 though most are still focused on applications of technology rather than pure R&D.35 While there were only an estimated 30 labs in China in 2000,36 official government numbers show that the number of labs reportedly grew to 600 in June 2004,37 750 in 2006,38 1,160 in 2007, and 1,200 in March 2010.39 As of the end of 2009, 465 of these R&D centers were established as independent legal entities with approval of the Ministry of Commerce. These centers have a total investment amounting to US$12.8 billion and registered capital of US$7.4 billion.40

Companies with known R&D labs span the spectrum of foreign MNCs in China, from the largest Fortune 100 firm to smaller concerns. Among the most prominent MNCs with R&D centers are Microsoft, IBM, Motorola, Siemens, Nortel, GE, GM, Volkswagen, and Honda.41 These R&D centers are not evenly divided across the Chinese economic spectrum, but concentrated in certain sectors:

Foreign R&D organizations established by multinational firms (MNEs) are highly concentrated in the information and communication technology (ICT) industries (including software, telecommunication, semiconductors and other IT products) but equipment and components, biotechnology and drugs as well as automotive industries also attract a significant amount of foreign R&D investment.42

Other sectors with disproportionate participation by foreign R&D centers include electronic and telecommunications equipment manufacture, transport equipment manufacture, medicine production, and the chemical industry.43

Not surprisingly, these foreign R&D centers are largely clustered in a small number of cities in China, including Beijing, Shanghai, Guangdong, Shenzhen, and Tianjin.44 In Beijing, one can find R&D labs run by ABB,

Agilent Technologies, Alcatel Lucent, DoCoMo, Ericsson, France Telecom,

Fujitsu, Google, Hewlett Packard, IBM, Infineon, Intel, Matsushita/Panasonic, Microsoft, Motorola, NEC, Nokia, Nortel, Novo Nordisk, Novozymes, P&G, Ricoh, Samsung, Siemens, and Sony Ericsson. Shanghai possesses a similarly impressive roster of R&D centers, including labs started by Alcatel Lucent, AMD, Astra Zeneca, Ciba Spec. Chemicals, Cisco Systems, Coca Cola, Dell, Dupont, Electrolux, Eli Lily, Ericsson,

General Electric, General Motors, GSK, Hewlett Packard, Honeywell, Intel,

Microsoft, Motorola, Omron, Philips, Ricoh, Roche, Rohm and Haas, Samsung, Siemens, Sony, Toray, and Unilever.45

Why these cities? First, they are a comfortable locale for foreigners, given their large expatriate populations and the presence of many foreign companies. Indeed, some analysts have criticized the overabundance of R&D centers in these metropoli, arguing that the clustering may be stifling the exploitation of innovation in second- and third-tier cities in China. In terms of the available Chinese workforce, these cities also all share similar demographic and socio-economic characteristics, such as relative affluence, higher than average education levels, advanced communications infrastructure, and major universities. In other words, a perfect environment for fostering innovation.

There are at least three common ways for foreign firms to establish R&D operations in China. The first is to start a wholly independent R&D lab. In the early days of the Chinese economic reforms, a wholly owned foreign enterprise (WOFE) was not an option, but is now possible thanks to Beijing’s accession to the World Trade Organization on December 11,

2001.46 A high-tech WOFE requires startup capital of at least RMB100,000–500,000, but has the advantage of providing the best chance of protecting a company’s intellectual property (IP) and technology secrets, since it does not need to expose the IP to a Chinese partner. The second is to set up an R&D unit within a branch of an existing Chinese company as a joint venture opportunity. The third is to conduct cooperative R&D with a Chinese university or research institute.47 In the latter two cases, the devil is in the details with respect to percentage shares of ownership, sophistication of transferred technology and equipment, participation of technical experts from each side, the role of graduate students, negotiated length of time before the venture reverts to Chinese control, and division of the financial remuneration from any technology applications. 

Reasons for the growth of foreign R&D labs

On the face of it, there are many clear barriers to entry and disincentives for foreign companies seeking to do R&D in China. A 2006 OECD study listed at least eight, though there could be more: (1) overcapacity and “unknown” consumers (especially in the automotive industry); (2) lack of experienced/qualified specialists (especially in the automotive and biomedical industries); (3) weakness of institutional infrastructure, e.g., China’s known problems with protecting intellectual property rights (IPR); (4) uncertainty regarding the objectivity and impartiality of the Chinese legal system; (5) extremely intensive competition among Chinese players; (6) high employee turnover, especially in the private sector; (7) a realization that establishing R&D facilities simply for “window dressing” no longer works; and (8) the abolishment of some preferential policies.48 In addition to these, there are at least three other barriers. First, often the volume of new products is insufficient to achieve economies of scale, due to either overcapacity (e.g., automotive industry) or competition (e.g., telecoms industry). Second, there is a lack of local experienced or qualified specialists in certain sectors. Third, the technology and R&D gap between foreign and domestic firms may give foreign firms the opportunities to capture some “high-end” markets in the short run, but the possibility for long-term strategic partnership with domestic firms is still limited.

So, given these barriers, why do foreign companies still seek to conduct R&D in China?

There are three interlocking reasons, including (1) governmental regulation and laws encouraging the establishment of the labs, (2) desire by MNCs to globalize their innovation cycle and tap expertise and resources around the world, including relatively cheap, skilled, and well-trained pools of R&D personnel in China, and (3) desire by MNCs to improve their penetration of the China market by adapting their products better to local markets.49

Reason 1 ("Pull"): Governmental regulation and laws encouraging the establishment of foreign R&D labs

After 30 years of rapid economic development, Beijing is implementing long-range industrial plans designed to transition the Chinese economy from export processing of foreign innovation to indigenous innovation. The plans are driven in part by a belief that China’s current economic structure is limited by reliance on foreign technology. As State Councilor Liu Yandong told an internal audience:

The majority of the market is controlled by foreign companies, most core technology relies on imports, [and] the situation is extremely grave as we are further pressured by developed countries who use blockades and technology controls – if we are not able to solve these problems we will forever be under the control of others.50

The success of China’s indigenous innovation plans is predicated, in part, on accelerated technology transfer from foreign companies and research centers, leveraged by the competition for access to the Chinese market. The Chinese government has so far actively encouraged and promoted foreign corporate R&D in China, viewing it as a way to upgrade domestic technology and skills by importing, and ideally internalizing, foreign knowhow.51 By 2015, the plan calls for China’s overall reliance on foreign technology to drop to 30 percent from its 2006 level of 60 percent.

Government organizations

At the national level, the Chinese government shares responsibility for identification, recruitment, and exploitation of foreign science and technology across a wide range of inter-agency coordination groups, ministries, and industrial policy commissions. At the highest level, the Leading Group on Science, Technology and Education, until recently headed by Premier Wen Jiabao, is a permanent Politburo-level coordination mechanism across both Party and government organs. From the loins of this organization sprang an ad hoc Leading Small Group for the Development of a National Mid- to Long-Term Science and Technology Development Plan in 2003, which eventually produced the Outline for National Medium to Long-Term Science and Technology Development, described in detail below. The State Council Steering Group for Science, Technology and Education is a top-level government coordination mechanism, which meets two to four times a year to deal with strategic issues. A number of ministerial level agencies – the National Development and Reform Commission (NDRC),52 the Chinese Academy of Sciences (CAS), the Chinese Academy of

Engineering (CAE), sectoral line ministries such as the Ministry of Industry and Information Technology (MIIT)53 and the Ministry of Agriculture (MOA), and the National Natural Science Foundation of China (NSFC)54 – play a direct role in designing and implementing S&T and innovation policies. A number of other ministerial agencies, notably the Ministry of Finance (MOF), the various state banks (e.g., China Development Bank), the Export-Import Bank of China, and the Ministry of Commerce (MOC) have significant influence on financing S&T innovation policies and implementation, while others, such as the Ministry of Personnel (MOP), the Ministry of Education, and the State IP Office (SIPO), also exert an important influence on human capital issues such as attracting returning scientists.55 Within these ministries, some key departments may be identified:

  Ministry of Science and Technology's Department of High and New Technology Development and Industrialization56 is responsible for formulating plans and policies for the development and industrialization of high and new technologies in related fields, organizing the implementation of the National High Technology Research and Development Program, National Key Technologies R&D Program, and other S&T programs, guiding the construction of statelevel hi-tech industrial development zones, facilitating the construction of a technology service system for hi-tech industrialization, and drawing up policies for the promotion of technology market development. Subordinate divisions include General Affairs and Planning, Energy and Transportation, Information and Space, Advanced Manufacturing and Automation, Materials, and Industry Development.

  Ministry of Science and Technology 's Department of Basic Research57 is responsible for formulating plans and policies on national basic research, organizing the implementation of the National Program on Basic Research Projects and key science research programs, mapping out plans for the building of key science projects, organizing the construction of state laboratories, state key laboratories, and state field science observation bases, and facilitating the infrastructure for S&T research. Subordinate divisions include General Affairs and Basic Research, Bases Administration, and Major Projects Administration.

  Ministry of Science and Technology's Department of Development Planning58 organizes the formulation of S&T development blueprints and annual plans, puts forward suggestions on fund allocation for national S&T programs, and coordinates the implementation of the programs. It works with related agencies in giving advice to the building of national S&T platforms and major innovation bases, stimulates regional S&T advancement, and serves in the administration

of S&T projects and achievements appraisal, as well as the administration of S&T statistics. Subordinate divisions include General Affairs and Planning, Planning and Coordination, High Technology Research and Development, Key Technologies Research and Development, Facilities and Infrastructure,, Regional Technology Development, and Evaluation and Statistics.

  Ministry of Science and Technology's Department of Policy, Regulations and Reform (Office for Building Innovation System)59 is responsible for drafting plans and policies to enhance rural development through S&T, organizing the implementation of a hi-tech R&D plan, S&T supporting plan and policy-guiding S&T plan in related fields, promoting rural S&T progress, guiding the application and demonstration of key S&T achievements, and leading the development of agricultural science parks. Subordinate divisions include General Affairs and Policy Study, Regulations and IPR, Institutional Reform (Division of Science and Technology Personnel Management), and Science and Technology Outreach.

  National Development and Reform Commission's High-Tech

Industrialization Department60 "organizes and coordinates the relevant international cooperation and international exchanges."

  Ministry of Industry and Information's Science and Technology Department "organizes, formulates and implements regulations, policies and standards for high-tech industries involving biomedicine, new materials, aviation, aerospace, and information technology."61   Ministiy of Foreign Trade and Commerce's Mechanical, Electronic, and High-Tech Industry Department "organizes and promotes mechanical, electronic, and high-tech foreign trade exchanges and cooperation with enterprises."62

Industrial plans, policies, and regulations

“China encourages multinationals to establish R&D centers in China.”

– Chinese President Hu Jintao at the national science and technology conference in early 200663

Since the late 1970s, relevant Chinese government organs have published plans, regulations, and policies encouraging the transfer of technology through the establishment of joint R&D labs. The most important and farreaching of these plans is the Medium and Long Term Plan for S&T

Development, 2006–2020   (MLP), published in

2006 by the Ministry of Science and Technology. The MLP describes itself as the “grand blueprint of science and technology development” to bring about the “great renaissance of the Chinese nation.” The MLP “is part of the government’s effort to shift China’s current growth model to a more sustainable one, seeks to make innovation the driver of future economic growth, and emphasizes the building up of an indigenous innovation capability."64 The overarching goal is to make China an “innovationoriented” society by the year 2020 and over the longer term to transform China into one of the world’s leading “innovation economies,” emphasizing the need to develop capabilities for “indigenous” or “home-grown innovation.”65 Specifically, the MLP outlines three strategic objectives: (1) building an innovation-based economy by fostering indigenous innovation capability; (2) fostering an enterprise-centered technology innovation system and enhancing the innovation capabilities of Chinese firms; and (3) achieving major breakthroughs in targeted strategic areas of technological development and basic research.66 If achieved, China’s leaders believe that the country will never again be dependent on foreign technology. As Premier Wen Jiabao said in 2009 when launching the “indigenous innovation” regulations: “Only by using the power of science and technology will China be able to produce the immeasurable ability to allow nobody to stop our advance forward.”

To achieve these goals, the MLP must overcome significant structural challenges. The OECD assesses that China must undergo a

change from an uncoordinated, piecemeal style of S&T policy making to a coordinated whole-ofgovernment policy approach; from policies targeted at promoting R&D activities to policies for creating an innovation-friendly framework; and from one-size-fits-all policy measures to finetuned and differentiated policy measures tailored to delivering more sophisticated support for policy needs.67

At the outset of the period covered by the plan, the MLP is clear that foreign technology and know-how will play a key role in jump-starting indigenous innovation, and that the government must pursue national industrial policies designed to obtain and exploit this foreign information. The MLP defines “indigenous innovation” as “enhancing original innovation through co-innovation and re-innovation based on the assimilation of imported technologies.” Indeed, the MLP rejects the importation of foreign technology without a clear plan to convert it into Chinese technology: “One should clearly be aware that the importation of technologies without emphasizing the assimilation, absorption and reinnovation is bound to weaken the nation’s indigenous research and development capacity.” These bald assertions lead some foreign analysts to conclude that the MLP is a “blueprint for technology theft on a scale the world has never seen before.”68

The document acknowledges that foreign technology played a key role in the early years of the Chinese economic reform period, allowing China to “improve the level of industrial technology, enhance innovation capacity, [and] promote economic and social development.”69 Yet another period of acquiring foreign technology and know-how is perceived as critical for China to eventually wean itself from this reliance on foreign technology and know-how, transitioning to indigenous innovation. In a section entitled “The Expansion of International and Regional Scientific and Technological Cooperation and Exchanges,” the plan calls for the strengthening of

“national capability of independent innovation.” To achieve this goal,

we must make full use of favorable conditions for opening up and expanding various forms of international and regional scientific and technological cooperation and exchanges.70

Specifically, the document calls for government units and enterprises “to encourage scientific research institutes, universities and overseas research and development institutions to establish joint laboratories or research and development centers . . . [and] to encourage multinational companies to set up research and development institutions.”71 In addition, the document calls for institutions to:

  "further encourage multinational companies to establish R&D institutions in China to improve China's overall research and development level";

  "encourage transnational corporations and domestic research institutions, schools, enterprises [to] expand R&D cooperation";

  "encourage foreign investment and technological achievements in

R&D centers in China for industrial production";

  "encourage foreign investment enterprises . . . and private enterprises to transfer technology";

  "encourage and guide enterprises and multinational companies or developed countries with advanced technology enterprises to establish a strategic alliance to participate in the technical R&D activities by transnational corporations"; and

  "encourage domestic enterprises and foreign-invested enterprises to develop technology supporting, high-tech research and development to accelerate the process of internationalization."72

Reading between the lines, the policies also encourage companies, whether domestic or foreign, to engage in R&D in China to boost domestically owned intellectual property (IP).73

Why would foreign companies participate in this wholesale transfer of innovation, particularly when it is designed to facilitate domestic innovation presumably at the expense of multinational companies? Serger and Widman point out the obvious: “The bait is the large Chinese market.”74 But to further sweeten the pot, foreign companies are given incentives to set up manufacturing in China and transfer technological knowledge to Chinese partner companies. As an example, foreign automotive firms seeking to sell in China face high import duties, leading them to pursue joint-venture manufacturing relationships. The energy sector is under pressure to transfer technology in exchange for commissions. Telecom companies have been encouraged to move production and increasingly R&D to China. Local procurement is encouraged by offering significant tax rebates, among other things.75 In addition to the traditional fear of technology dependence, this mindset explains why the government seeks a 30 percent reduction of reliance on foreign technology in 15 years’ time, down from the current assessment of 60 percent.76

Following the promulgation of the MLP in 2006, the Chinese government has issued a series of implementation documents:

  The February 2006 "Medium and Long Term Plan for S&T Development, 2006—2020" detailing preferences for domestic goods and service providers.

  A September 2006 tax bureau "Circular on Preferential Tax Policies for Innovation Enterprises" offered a two-year exemption from enterprise income tax.

  The December 2006 "Administrative Measures on the Accreditation of National Indigenous Innovation Products" outlined the plans for creating national indigenous innovation product catalogs.

  The May 2007 "Measures for Administration of Government Procurement Budgets for Indigenous Innovation Products" warned government at all levels to develop specific indigenous innovation procurement plans or they would lose procurement funds.

  Also, in May 2007, "Measures for Assessment of Government Procurement of Indigenous Innovation Products" lowered government procurement supplier qualification standards for companies doing indigenous innovation.

  In December 2007, the MOF issued "Measures for the Administration of Government Procurement of Imported Products" which directed that approval by a board of experts is necessary for government entities to purchase imported goods. It called for favoring foreign suppliers that provide the domestic industry with technology transfers and training services.

  A January 2008 "Enterprise Income Tax Law" offered a preferential rate of 15 percent to high-tech enterprises designated by the government as indigenous innovation companies because they developed and owned their intellectual property.77

Perhaps the most important of these is the National Indigenous Innovation

Products Accreditation Program (Notice 618)   , more commonly known as the “indigenous innovation” regulation. The Program implements the “Measures for the Administration of the Accreditation of National Indigenous Innovation Products,” issued in November 2006. The key elements of the regulation, jointly issued in November 2009 by the Ministry of Science and Technology (MOST), the National Development and Reform Commission (NDRC), and the Ministry of Finance, include (1) a mandate for an accredited catalog of products given priority in government procurement; (2) requirement that the products contain domestically owned intellectual property rights, and that the applicant's use, disposal, and improvements of the intellectual property involved in the underlying product must not be subject to foreign restrictions and any trademark used must be registered in China first and must not be restricted by related foreign brands; and (3) an initial focus on six high- and new-technology fields including computers and application equipment; communications products; modern office equipment; software; new energy and new energy devices; and high-efficiency and energy-saving products.

The issuance of the indigenous innovation regulations has roused a strong reaction from foreign business and trade associations. In a December 2009 letter to Wan Gang (Minister of Science and Technology), Xie Xuren (Minister of Finance), and Zhang Ping (Chairman of the National Development and Reform Commission), more than 30 foreign organizations asserted:

the criteria of Notice 618 diverge markedly from global practices and include unique requirements that the product’s intellectual property be developed and owned in China, and that any trademarks be originally registered in China. By contrast, quality, performance and value are given only a minimal role. China and the international community have a common interest in ensuring robust protection of intellectual property rights as we forge a closer economic agenda. China’s new criteria fail to recognize the truly collaborative, cross-border and global nature of R&D that produces innovation and that few if any products are developed in a single national territory. Establishing local intellectual property ownership as a market access condition would run counter to free and open trade and to fostering collaborative innovation.78

As a result of this outcry, China’s indigenous innovation regulations became the subject of dialogue between senior government officials at the Sino–US Strategic & Economic Dialogue in spring 2010.

Reason 2: MNCs seeking to improve their penetration of the China market by adapting their products better to local markets

According to research by Quan Xiaohong, MNC R&D labs in developing countries are established primarily for the purpose of image building, local adaptation, supporting local manufacturing subsidiaries, and, at most, product development for local markets.79 This is in line with the widely held belief that “R&D follows production.”80 Evan Thorpe concurs, arguing that the original impetus for MNC investments in R&D in China was localization of existing products for the China market, and points out that “most of the handful of R&D centers that conduct basic research did not begin to do so until they had already established strong product development functions.”81

One way of categorizing these activities is provided by Quan’s field study and survey on MNC R&D labs in China, which identified four types of R&D activities in those labs: “old product for local market”; “new product development for local market”; “new product development for global market”; and “research”.82 These first two represent the early phases of foreign R&D in China. MNCs’ branch R&D labs of this type focus on relatively low innovative activities such as local adaptation of imported products, technical support for local sales, and production support. No effort is put into developing new products in the emerging market, only product adaptation. Many companies like Microsoft, SAP, and Nokia were engaged in this type of activity when they entered China.83 In “new product development for local market,” MNC R&D labs in host developing countries begin to explore the local market through identifying and meeting local needs from the beginning of product development. MNCs often start new product development after they get familiar with local market conditions.84 The later phases, “new product development for global market” and “research,” are advanced stages of development.

Evan Thorpe offers two additional functions for local R&D work. The first is information technology support, customer service, and after-sales services. As Thorpe writes,

These types of services are especially important for companies that deliver complex products that require technical support. As Chinese companies expand, they buy large orders of sophisticated industrial goods more frequently and, as a result, often require plentiful, high-quality support provided by a large and able staff.

The second function is supply chain base support. Thorpe argues that “proximity to suppliers and other partners means that companies can address matters locally and immediately. Locating complementary functions near each other can reduce costs or even provide tax exemptions depending on local taxation requirements.” The final benefit of in-country R&D is “proximity to customer base,” whereby “locating R&D centers close to the customer base allows companies to respond more quickly to local demands for new or adapted products.”85

Reason 3: Desire by MNCs to globalize their innovation cycle and tap expertise and resources around the world

While the original impetus for moving basic R&D abroad was product localization, many MNCs now see foreign locales as a source or perhaps even a center of innovation.86 At the strategic level, Western MNCs have sought to globalize their R&D enterprise for multiple reasons. Some want to take advantage of cheap native labor to perform basic R&D work, while retaining core innovation at home. Others have decided to go “all-in” and move their global R&D centers offshore, hoping to benefit not only from lower costs but also to tap into pools of local innovation. As Serger argues, these two modes together are changing the global R&D game, as “transition and developing countries are becoming increasingly important sources and drivers of innovation (demanding and supplying new innovative solutions)

[emphasis added].”87

In particular, many outside analysts view China as an attractive innovation hub. Serger and Widman argue that “China’s rise as an important knowledge base and large domestic market will make it an increasingly strong contender for R&D.”88 Moreover, they assert that “China will rapidly gain ground in knowledge-intensive sectors, and it may become a world leader in some fields of R&D.”89 Denis Fred Simon, a specialist in Chinese science and technology, remarked in the New York Times that “the Chinese are going to become sources of innovation . . . they will find themselves enmeshed in global R&D more and more.”90

But why are companies increasingly choosing to locate their innovation in China as against other countries?91 Is it solely a response to Chinese government pressure? As discussed earlier in the chapter, Beijing’s policies certainly have a large impact on the business environment, distorting the level playing field and creating perverse incentives for technology transfer. Yet global firms also appear to be shifting innovation to China of their own accord. According to Kate Walsh, companies have undergone a key shift, where the dominant rationale for establishing R&D in China has changed from catering to Chinese governments’ requirement to one stressing internal corporate interests.92

As a result of these shifts, China is increasingly becoming a magnet for innovation centers. Speaking in 2004, Max von Zedtwitz, a professor at Tsinghua University, claimed that “within five years, China could overtake UK, Germany and Japan as a base for corporate research, leaving it second only to the US.”93 According to a global survey by the Economist Intelligence Unit in September 2004, which interviewed 104 senior executives (with 37 percent from US-based companies, 34 percent from European companies, and 16 percent from Asia-based companies), China was identified as the top R&D location by 39 percent of respondents, followed closely by the US, India and then the UK. Multinationals have increased their investment in R&D centers in China by a large margin as the market there becomes more important in their global business strategy. Some global business giants, such as GE, Philips, Motorola, and Siemens, invest tens of millions of US dollars in R&D centers in China, the Ministry of Commerce said.94 Dr. Li Wanlin, senior vice-president of Siemens (China) Telecommunication Ltd., said that the establishment of Siemens China R&D centers is a vitally important strategy for the German company’s future development.95

But what is the real form of this innovation and R&D work? Is it largely a PR exercise to ameliorate Chinese government edicts, or is there genuine innovation occurring? As always, the picture is complicated, with a wide range of activities subsumed under the term “research and development.” According to Xinhua, some centers (Microsoft, Nokia, Bell-Alcatel, and Panasonic) only conduct basic R&D work.96 At the same time, some R&D centers have become the global R&D centers for MNCs.97 Quan noted that her 2004 survey of MNC R&D labs in information technology industries in Beijing found that these labs are not just providing technical support, product localization, or product development for the local market; rather, they are developing products for the global market.98

Building on the typology discussed in the previous section, Quan distinguishes between “new product development for global market,” and “research” activities.99 The former includes product development conducted in MNC R&D branches in developing countries not only for the host local market, but also for the “developed country” market and/or other emerging markets (mostly developing countries). This type of R&D activity marks a change in business strategy by MNCs, indicating an emphasis on exploration of global R&D labor.100 The latter R&D activities, by contrast, are identified as “research” activities. According to the OECD definition of R&D, research further includes basic research and applied research: “basic research is experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundations of phenomena and observable facts, without any particular application or use in view.”101 Applied research, by contrast, “is also original investigation undertaken in order to acquire new knowledge. It is, however, directed primarily towards a specific practical aim or objective.”102 Companies and analysts have also identified exemplar cases of this latter type in China. For example, Nokia moved core R&D for its handset operating system to its Beijing R&D center.103 By 2010, 5 percent of R&D engineers in China designed 40 percent of worldwide Nokia phones.104 Microsoft’s research center in China is as productive in terms of papers and patents as any other Microsoft R&D center in the world.105 For General Electric, its “ultra-compact medical imaging technology” was developed in Beijing, which it claims pioneered the concept of “reverse innovation.” Finally, ABB has located its worldwide robotics R&D and HQ in Shanghai since 2005.

Of course, it is far too didactic to expect Quan’s typology to be so clearly delineated in an actual research center. As she writes,

It is not unusual to observe all three types of R&D activities within one MNC R&D lab. It appears in some instances that MNC R&D labs are likely to focus on Type I activities upon entering the Chinese market. For example, R&D activities of the SAP Lab in Beijing have evolved from Type I to Type II then to Type III over these years.106

Depending on your point of view, one key facilitator or bottleneck for the evolution of innovation centers in China is people. Not surprisingly, Quan found in survey data that “availability of R&D personnel” was the most important location incentive for MNC R&D labs in China.107 Quan elaborates,

Availability of R&D personnel is very essential for MNC R&D labs in China. One major function of these R&D labs is product development for the global market as stated earlier, and the labs usually provide some small modules to contribute to the overall R&D task. As a result, the R&D work conducted in the labs in China is less technologically sophisticated than work done in developed countries. What MNC R&D labs need in the host developing countries is essentially a rich pool of low-cost, but considerably quality R&D labor. While market information can be crucial for local market-oriented R&D activities, the need for R&D labor pool is pervasive for all R&D lab activities in China.108

Looking at official numbers, it would appear that high-quality personnel should not be a problem in China. According to the US National Science Foundation’s China Office, an estimated 3.2 million people were involved in China’s R&D activities in 2009, the largest number in the world.109 The number of scientists and engineers more than doubled between 2000 and 2008 to 1.59 million.110 It is easy to deceive with raw numbers, however, especially given the size of China’s overall population. Indeed, the density of researchers in China remains lower than that of developed countries, even if China is rapidly closing the gap. In 2007, there were 1,071 researchers per million population in China, compared to 5,573 in Japan, 4,663 in the USA (2006), 3,532 in Germany, and 4,181 in the UK.111

Of course, numbers do not tell us anything about quality. One MNC R&D lab manager proudly presented that in 2006 they hired 100 goodquality engineers out of an application pool of 10,000.112 But for most MNCs, what Chinese employees lack in quality they make up for with their low labor costs. According to the vice-president of the SAP lab, “there are very creative software developers in China. Although there are also good software developers in Germany, they are too expensive.”113 Quan writes,

While supply is abundant and quality is good, these scientists and engineers are very inexpensive in China compared to many other countries. For example, in Beijing, the average monthly salary of a design engineer in a state-owned firm in IT industries ranges from 3,000 RMB (~ US $380) to 5,000 RMB (~ US $650). In private firms, the salary can be 50% to 60% higher. Multinational corporations in Beijing usually provide a higher salary to attract the best people in the country to work for them. They offer approximately US$1,000 to US$2,000 as monthly wages to their employees (according to interviews with MNC R&D lab managers). This is still much lower than the pay of a US engineer for similar work. In Shanghai, the salary level is about the same as in Beijing. But in other cities in China, the salary is much lower. For instance, in Chengdu, the capital city of Sichuan province which has also attracted an increasing number of MNCs, MNCs pay about 50% less to engineers compared to those in Beijing.114

This attention to costs has only gotten more acute with the global economic downturn since 2008 and the margin pressures on various industries in both the global and the Chinese markets.

In addition to personnel, another key indicator of evolutionary success for foreign R&D centers is the nature of their partnerships in China.115 One popular arrangement is to establish an R&D center at a Chinese university. Quan Xiaohong identifies multiple formats for an MNC–university relationship, including outsourcing, sponsored research, joint-lab model, internship, training, or donation.116 Evan Thorpe outlines the advantages that come from pairing with a post-secondary educational institution:

Partnerships with universities are valuable to companies’ R&D potential. For IP and management reasons, these partnerships are usually contracted on a project-by-project basis, but a single project can generate momentum toward future cooperation. Because many universities have close ties to the government, these projects and relationships between experts and professionals can help lead to government procurement projects. Joint efforts in curriculum development, book publishing, and special programs are key ways through which universities and enterprises can strengthen ties and promote innovation. Because university resources are limited, foreign companies often contribute training, equipment, and funding to the partnership projects. In addition to building relationships and local ties, companies can use these partnerships to educate potential employees and customers about their products and introduce new products to local markets. Companies should carefully evaluate university capabilities and determine which key academics are leaders in their fields and most suitable to help run cooperative R&D projects. Many top Chinese universities have faculty with significant experience in conducting research jointly with MNCs.117

Another popular arrangement is a joint venture (JV) with a commercial enterprise in the same industry. Thorpe again lays out the pros:

A joint venture (JV) can allow the foreign partner to access the PRC partner’s local talent and customer networks. Even wholly foreign-owned enterprises can conduct joint projects with local partners to gain access to local resources. In the current PRC operational climate, many tech companies and manufacturers of advanced products have expanding customer bases with changing needs.118

Yet it is the choice of these partnerships that often raises the first concerns about science and technology espionage in China. The following section explores the national security implications of the rise of the foreign R&D lab in China, especially the possible illicit transfer of foreign technology, know-how, and expertise. 

Potential national security implications of foreign R&D labs

The evolution of foreign R&D labs in China remains controversial, raising fundamental structural questions for trade relations and national security. Does the rise in offshore investment and R&D in China have a profound and positive impact on China’s technology development capabilities or does it necessarily weaken or threaten America’s own technological strength and leadership?119 Is industry right when it says offshoring of R&D is a necessary evil in an age of globalization in which the Chinese market plays an increasingly vital role?120 Is there actually little cause for concern because of China’s past failures to assimilate technology? Will the US stay ahead regardless because of superior innovation?121 Or, as Kate Walsh has succinctly put it: “when do we need to worry?”122

A balanced assessment of foreign labs in China must acknowledge that, at least from the perspective of MNCs and policy-makers in China, the globalization of R&D is generally perceived as a positive development. The optimists argue: (1) R&D investments by FDI firms are an important step to further improve the “quality” of foreign investment in China as well as to promote the S&T development in the Chinese business sector; (2) the establishment of full-scale R&D centers engaged in partnerships with local research organizations fosters “brain circulation” of human resources; (3) the emerging global R&D network and improved domestic environment of advanced physical infrastructure and research networks attracts expatriate scientists back to China; (4) newly established R&D centers will bring new knowledge and new projects which will result in training for Chinese workers at the forefront of international industry; (5) the R&D centers will become the center of industry or sector clusters, and may attract more foreign players; and (6) MNCs may eventually decide to move their R&D headquarters to China.123 As an overall assessment, Walsh sums up the “glass half full” view: “Given the more manageable, preferred form of wholly foreign-owned R&D investment in China and the beneficial effects possible in a global economy, the rewards from high-tech R&D investments in China appear at present to outweigh the potential risks to US interests.”124

But the increasing legions of pessimists about the Chinese business environment and the overall dynamic of US–China trade relations counter: (1) the R&D activities of most foreign firms/labs are still predominantly development focused (rather than research focused) to support local business and customers; (2) the development carried out in China is to a large extent targeted at the Chinese market, with a few exceptions of worldwide mandates for certain products and technologies; (3) IP protections are still too primitive and local legal systems too unpredictable;125 (4) the links between foreign-invested R&D firms and domestic firms and local R&D institutes are still weak; (5) domestic firms have limited absorptive capacity and continued weakness of human resources, as well as the limited labor mobility between foreign and domestic firms; and (6) the market entries of multinationals and increased concentration among a few large foreign firms have caused concerns of monopolistic power and decreased market competition. Some Chinese academics and policy-makers criticize foreign firms’ presence and their behavior in China, claiming that they charge unduly high license fees for their patents, that they “crowd out” domestic firms in the market for highly skilled labor, and that they thwart technology transfer and knowledge spillovers.126 Furthermore, foreign firms are seen as dominating standards and technology platforms, and reducing Chinese companies to the role of producers with low profit margins.127 Finally, Sun and Wen identify internal structural impediments to bringing R&D to China and making it productive: (1) rising wages; (2) high mobility and turnover; (3) lack of experience among recent graduates; (4) limited creativity; and (5) cultural differences with their Western counterparts.128

Reading through the optimistic and pessimistic assessments, it is clear that R&D in China is not an unalloyed good or bad, and offers no easy Manichean outcome. Rather, there appear to be tremendous variations between sectors and within sectors, between different geographic locales, and between different levels of the system (national, provincial, local). Moreover, the policy and business environment is not static, but has changed over time. Walsh argues:

it is important to note that the risks from . . . R&D collaboration with Chinese partners probably were highest under the joint R&D ventures formed during the mid- to late-1990s period of investment. These risks may have lessened since due to the shift in many R&D investments to wholly foreign-owned enterprises. Due to WTO reforms, foreign investors are no longer required by law to work with Chinese partners on R&D or to establish R&D centers as a condition for market access (although this is still encouraged). Moreover, while both the joint venture and WFOE models involve a transfer of technological know-how to mostly locally hired staff, there is an important distinction between conducting R&D with a joint venture partner – who shares equally in any IPR resulting from R&D collaboration – and similar work conducted under the WFOE structure. In the latter case, the IPR remains solely that of the foreign investor, who now has greater recourse in the event of IPR infringements in China (and an option short of having to dissolve the venture entirely if serious concerns arise). Thus, much of the damage and the potential risk from this type of technology transfer might already have passed.129

Going forward, the risk can likely only be evaluated on a deal-by-deal basis, not at the macro-level, and the relative gain or harm is deeply dependent on the risk mitigation strategies implemented by the owners of the intellectual property. In other words, there is no “one-size-fits-all” critique of foreign R&D transfers in China, despite the ideological temptation to do so.

What are the types of policy responses that the US government could pursue to mitigate the possible loss of intellectual property and technological competitiveness to China? Kate Walsh offers two policy recommendations for the bilateral relationship, one near term and the other far term:

In the near-term, the US “deemed export” rule should be amended to cover advanced foreign

R&D investments and technology transfers outside the United States. Over the longer-term, the US export control system should be reformed to provide a means of monitoring global R&D and other newly emerging international business dynamics.130

On the latter point, the Obama White House has undertaken a series of initial steps to reform export controls, but the measures seem focused on consolidation of the technologies we seek to control and better coordination of the controls under a unified organization. Walsh’s final recommendation is perhaps the most strategic and long term, and focuses attention on a neglected but critical determinant of the future strength of American competitiveness, our own R&D base and workforce:

Although the United States benefits from a continued net inflow of R&D investment from around the world, US government funding for basic research and education should be increased in order to maintain the US lead in critical high-tech industries and innovation. This is crucial to ensuring the United States remains economically, technologically, and militarily competitive. Additionally, as foreign nationals working in US labs, universities, and high-tech companies become able to find similar work in their own economies due to globalization, the US government must invest more in grade school and secondary education, particularly in basic sciences, mathematics, and engineering, or risk falling behind.131

Notes

1 Philip E. Auerswald and Lewis Branscomb, “Research and Innovation in a Networked World,”Technology in Society 30, 2008, pp. 339–347, p. 339.

2 Battelle, 2012 Global Funding Forecast, December 2011, www.battelle.org/aboutus/rd/2012.pdf. Sylvia Schwaag Serger, “Research and Innovation as a Forward-Looking Policy Response to the Crisis? The Case of Asia,” Presentation, June 26, 2009. See also Evan Thorpe, “Bringing R&D to China,” China Business Review 35, no. 2, March to April 2008.

3 Thorpe, “Bringing R&D to China.”

4 Xielin Liu and Nannan Lundin, “The National Innovation System of China in Transition: From

Plan-Based to Market-Driven System,” In The New Asian Innovation Dynamics, ed. Govindan Parayil and Anthony P. D’Costa, New York: Palgrave Macmillan, 2009. See also Sylvia Schwaag Serger, “Research and Innovation as a Forward-Looking Policy Response to the Crisis? The Case of Asia,” Presentation, June 26, 2009.

5 Organisation for Economic Co-operation and Development, OECD Reviews of Innovation Policy: China, p. 23.

6 Battelle, 2012 Global Funding Forecast.

7 2009 numbers found in Hao Xin, “China Hopes to Boost Basic Research as Overall R&D

Spending Soars,” Science Insider, November 24, 2010, http://news.sciencemag.org/scienceinsider/2010/11/china-hopes-to-boost-basic-research.html.

8 2006 numbers from OECD, OECD Reviews of Innovation Policy: China.

9 www.nsf.gov/statistics/seind12/c4/c4h.htm.

10 www.nsftokyo.org/rm10-02.pdf.

11 NSF China Office, “S&T Highlights: December 2010, January 2011,” www.nsfbeijing.cn/download/China_S&T_Highlight_Dec2010_Jan2011.pdf.

12 Sylvia Schwaag Serger and Eric Widman, Competition from China: Opportunities and Challenges for Sweden, Stockholm: Swedish Institute for Growth Policy Studies, 2005.

13 Kathleen Walsh, “China R&D: A High-Tech Field of Dreams,” in Yifei Sun, Maximilian vonZedtwitz, and Denis Fred Simon, eds, Global R&D in China, London: Routledge, 2009, pp.14–15.

14 http://r-center.grips.ac.jp/gallery/docs/11-05.pdf.

15 Rajneesh Narula and Antonello Zanfe, “Globalization of Innovation: The Role of MultinationalEnterprises,” in Jan Fagerberg, David C. Mowery, and Richard R. Nelson, eds, The Oxford Handbook of Innovation, New York: Oxford University Press, 2005.

16 United Nations Conference on Trade and Development, World Investment Report, 2005: Transnational Corporations and the Internationalization of R&D, 2005, www.unctad.org/Templates/webflyer.asp? docid=6087&intItemID=1397&lang=1&mode=downloads.

17 James R. Hagerty, “US Loses High-Tech Jobs as R&D Shifts Toward Asia,” The Wall Street

Journal, January 18, http://online.wsj.com/article/SB10001424052970204468004577167003809336394.html?

mod=googlenews_wsj, citing a report by the National Science Board, a policymaking arm of the National Science Foundation.

18 Jianmin Jin, “Foreign Companies Accelerating R&D Activity in China,” Fujitsu Research

Institute, May 13, 2010, http://jp.fujitsu.com/group/fri/en/column/message/2010/2010-05-

13.html.

19 Nannan Lundin and Sylvia Schwaag Serger, “Globalization of R&D and China: Empirical Observations and Policy Implications,” IFN Working Paper No. 710, Stockholm: Research Institute of Industrial Economics, 2007, p. 6.

20 OECD, OECD Reviews of Innovation Policy: China.

21 Ibid.

22 Serger, “Research and Innovation.”

23 “China Vows to Become Nation of Innovation,” People’s Daily Online, November 25, 2005.

24 Strategy for National Reinvigorating through S&T and Education (1995), Strategy for

Sustainable Development (1996), Strategy for National Reinvigorating through Talents (2002). See Serger, “Research and Innovation.”

25 Serger, “Research and Innovation.”

26 OECD, OECD Reviews of Innovation Policy: China.

27 Serger and Widman, Competition from China.

28 United Nations Education, Scientific, and Cultural Organization, UNESCO Science Report

2010: The Current Status of Science Around the World, http://unesdoc.unesco.org/images/0018/001899/189958e.pdf.

29 http://royalsociety.org/uploadedFiles/Royal_Society_Content/policy/publications/2011/42949 76134.pdf.

30 www.thefiscaltimes.com/Articles/2012/03/05/China-Leads-Global-Patent-Growth.aspx#page1. 31 http://ip.people.com.cn/GB/152255/16803234.html.

32 James McGregor, “Time to Rethink US–China Trade Relations,” Washington Post, May 19, 2010. See also James McGregor, “China’s Drive for ‘Indigenous Innovation’: A Web of Industrial Policies”, Washington, DC: US Chamber of Commerce, July 2010, www.uschamber.com/sites/default/files/reports/100728chinareport_0.pdf.

33 Lundin and Serger, “Globalization of R&D and China.”

34 Quan Xiaohong, “MNCs Rush to Set Up R&D Labs in China: What is the Nature?” NationalUniversity of Singapore, East Asia Institute. EAI Background Brief, No. 332, 2007.

35 “Multinationals Speed Up R&D Center Establishment in China,” Xinhua, February 12, 2006. 36 Quan, “MNCs Rush to Set Up R&D Labs in China.”

37 Ibid. 38 Ibid.

39 “China Home to 1,200 Foreign R&D Centers,” People’s Daily, March 16, 2010. For earlier numbers, see Evan Thorpe, “Bringing R&D to China,” China Business Review, March to April 2008. Of course, it should be noted that there are a number of reasons why these numbers may be distorted: (1) R&D is strategic and sensitive and therefore not always disclosed, (2) some foreign R&D activities exist more on paper than in reality, (3) some nonR&D activities are miscategorized as R&D to fulfill requirements, and (4) Foreign R&D labs are also missing from official S&T statistics. See Oliver Gassman and Zheng Han, “Motivations and Barriers of Foreign R&D Activities in China,” R&D Management 34, no. 4, September 2004, pp. 423–437; Quan Xiaohong, “MNC R&D Labs in China,” Stanford Projects on Regions of Innovation and Entrepreneurship, Presentation, November 29, 2005; and Lundin and Serger, “Globalization of R&D and China,” p. 6.

40 “China Home to 1,200 Foreign R&D Centers,” People’s Daily.

41 “Multinationals Speed Up R&D Center Establishment in China,” Xinhua.

42 OECD, OECD Reviews of Innovation Policy: China, p. 32.

43 “Multinationals Speed Up R&D Center Establishment in China.”

44 “China Home to 1,200 Foreign R&D Centers,” People’s Daily, March 16, 2010. See also

OECD, OECD Reviews of Innovation Policy: China, p. 32, and “Multinationals Speed Up R&D Center Establishment in China.”

45 Serger, “Research and Innovation.”

46 Walsh, “China R&D: A High-Tech Field of Dreams,” p. 14. For specific details about China’s accession to the WTO, see www.wto.int/english/thewto_e/countries_e/china_e.htm. For a general definition of WOFEs, see http://en.wikipedia.org/wiki/Wholly_Foreign_Owned_Enterprise. For details on how to set up a WOFE, see www.pathtochina.com/reg_wfoe.htm.

47 Maximilian von Zedtwitz, “Managing Foreign R&D Labs in China,” R&D Management 34, No. 4, 2004, pp. 439–452.

48 OECD, OECD Reviews of Innovation Policy: China, p. 34.

49 Ibid., p. 34; Lundin and Serger, “Globalization of R&D and China,” p. 6.

50 Quoted in McGregor, “China’s Drive for ’Indigenous Innovation’,” p. 17.

51 OECD, OECD Reviews of Innovation Policy: China, p. 34.

52 The NDRC is China’s “macro policy planning powerhouse.” See McGregor, “China’s Drivefor ‘Indigenous Innovation’,” p.11.

53 MIIT is responsible for creating and implementing China’s high-level industrial policies, particularly in telecommunications, software, Internet, and electronics sectors.

54 Within the Chinese system, McGregor describes NSFC as a “champion of focusing on peer-reviewed basic and applied research.” See McGregor, “China’s Drive for ‘Indigenous Innovation’,” p.11.

55 OECD, OECD Reviews of Innovation Policy: China, p. 49.

56 www.most.gov.cn/zzjg/jgsz/jgszgxjsfzycyhs/index.htm.

57 www.most.gov.cn/zzjg/jgsz/jgszjcyjs/index.htm.

58 www.most.gov.cn/zzjg/jgsz/jgszfzjhs/index.htm.

59 www.most.gov.cn/zzjg/jgsz/jgszzcfgytzggs/index.htm.

60 http://gjss.ndrc.gov.cn/.

61 http://kjs.miit.gov.cn/.

62 http://cys.mofcom.gov.cn/aarticle/gywm/200203/20020300003730.html.

63 “Multinationals Speed Up R&D Center Establishment in China,” Xinhua.

64 OECD, OECD Reviews of Innovation Policy: China, p. 46.

65 Ibid.

66 Ibid., p. 48.

67 Ibid., p. 46.

68 McGregor, “China’s Drive for ‘Indigenous Innovation’,” p. 4.

69 www.most.gov.cn/ztzl/gjzctx/ptzcyjxh/200802/t20080225_59303.htm.

70 www.most.gov.cn/kjgh/.

71 www.most.gov.cn/kjgh/.

72 www.most.gov.cn/ztzl/gjzctx/ptzcyjxh/200802/t20080225_59303.htm.

73 Thorpe, “Bringing R&D to China.”74 Serger and Widman, Competition from China.

75 Ibid.

76   (“Various Opinions on Encouraging the Introduction of Technology and Innovation, and Promoting Changes in the Foreign Trade

Growth Mode”), July 14, 2006. Accessed at www.most.gov.cn/ztzl/gjzctx/ptzcyjxh/200802/t20080225_59303.htm.

77 This list derived from McGregor, “China’s Drive for ‘Indigenous Innovation’,” p. 19.

78 http://cbi.typepad.com/files/12-10-09-international-business-letter-on-indigenous-innovationaccreditation-policy.pdf.

79 Quan, “MNCs Rush to Set Up R&D Labs in China.”

80 Serger and Widman, Competition from China.

81 Thorpe, “Bringing R&D to China.”

82 Quan, “MNCs Rush to Set Up R&D Labs in China.”

83 Ibid.

84 Ibid.

85 Thorpe, “Bringing R&D to China.”

86 MNC R&D labs also quickly realize that setting up a lab for pure image-building purpose iscostly.

87 Serger, “Research and Innovation.”

88 Serger and Widman, Competition with China.

89 Ibid.

90 Chris Buckley, “Let a Thousand Ideas Flower: China is a New Hotbed of Research,” New York Times, November 13, 2004, www.nytimes.com/2004/09/13/technology/13china.html?_r=0.

91 For more research on location incentives for MNCs’ R&D abroad, see Prasada Reddy, Globalization of Corporate R&D: Implications for Innovation in Host Countries, New York: Routledge, 2000; Oliver Gassmann and Max von Zedtwitz, “Organization of Industrial R&D on a Global Scale,” R&D Management 28, no. 3, 1998, pp. 147–161; Christopher A. Bartlett and Sumantra Ghoshal, Managing across Borders: The Transnational Solution, 2nd edn, Boston, MA: Harvard Business School Press, 1998; Jack N. Behrman and William A. Fischer, “Overseas R&D Activities of Transnational Companies,” The International Executive 22, no.

3, Fall 1980, pp. 15–17; Robert Pearce, “Decentralised R&D and Strategic Competitiveness: Globalized Approaches to Generation and Use of Technology in Multinational Enterprises,” Research Policy 28, nos 2–3, March 1999, pp. 157–178; and Lars Hakanson and Robert Nobel, “Determinants of foreign R&D in Swedish Multinationals,” Research Policy 22, nos 5–6, November 1993, pp. 397–411.

92 Walsh, “China R&D: A High-Tech Field of Dreams,” p.16.

93 Buckley, “Let a Thousand Ideas Flower: China is a New Hotbed of Research.”94 “Multinationals Speed Up R&D Center Establishment in China,” China Daily.

95 Ibid.

96 Ibid.

97 Ibid.

98 Quan, “MNC R&D Labs in China.”

99 Quan Xiaohong, “Multinational Research and Development Labs in China: Local and GlobalInnovation,” unpublished PhD Dissertation, University of California, Berkeley, 2005.

100 Quan, “Multinational Research and Development Labs in China.”

101 Organisation for Economic Co-operation and Development, Frascati Manual 2002, OECD Publishing, 2002, pp. 240, 245.

102 Ibid.

103 Maximilian von Zedtwitz, “Managing Foreign R&D in China: Some Lessons,” Presented at the“Asian Rise in ICT R&D Conference,” Brussels, February 17, 2011.

104 Ibid.

105 Ibid.

106 Quan, “Multinational Research and Development Labs in China.”

107 Quan, “MNC R&D Labs in China.” Other important factors that attract MNC R&D labs tolocate in China include “proximity to regional and local markets,” “low cost of R&D,” etc.

108 Quan, “MNCs Rush To Set Up R&D Labs in China.”

109 NSF China Office, “S&T Highlights: December 2010, January 2011.”

110 UNESCO, UNESCO Science Report 2010.

111 Ibid.

112 Quan, “MNCs Rush To Set Up R&D Labs in China.”

113 Ibid.114 Ibid.

115 For research on models of how MNCs organize and manage their global R&D network, seeBartlett and Ghoshal, Managing across Borders; Daniele Archibugi and Jonathan Michie, “The Globalization of Technology: A New Taxonomy,” Cambridge Journal of Economics 19, no. 1, 1995, pp. 121–140; Mark C. Casson, “Modelling the Multinational Enterprise: A Research Agenda,” Millennium Journal of International Studies 20, no. 2, 1991, pp. 271–285; J.W. Medcof, “A Taxonomy of Internationally Dispersed Technology Units and Its Application to Management Issues,” R&D Management 27, no. 4, 1997, pp. 301–318; Ivo Zander, “How do you mean ‘global’? An empirical investigation of innovation networks in the multinational corporation,” Research Policy 28, nos 2–3, March 1999, pp. 195–213; Gassmann and von Zedtwitz, “Organization of industrial R&D on a global scale”; Pearce, “Decentralised R&D and strategic competitiveness.”

116 Quan, “MNC R&D Labs in China.”

117 Thorpe, “Bringing R&D to China.”

118 Ibid.

119 Michael Pillsbury, “China’s Progress in Technological Competitiveness: The Need for a NewAssessment,” Report prepared for the US-China Economic and Security Review Commission, April 21, 2005.

120 Boston Consulting Group (BCG) and Knowledge at Wharton (KW), China and the New Rules for Global Business, China Report: Studies in Operations and Strategy, May 26, 2004.

121 George J. Gilboy, “The Myth Behind China’s Miracle,” Foreign Affairs 83, no. 4, July/August 2004, pp. 33–48.

122 Walsh, “China R&D: A High-Tech Field of Dreams,” p. 20.

123 Lundin and Serger, p. 6.

124 Walsh, “China R&D: A High-Tech Field of Dreams,” p. 129.

125 Thorpe, “Bringing R&D to China.”

126 Cheung K.Y., and Lin P., “Spillover Effects of FDI on Innovation in China: Evidence from theProvincial Data,” China Economic Review 15, no. 1, 2004, pp. 25–44.

127 Lundin and Serger, “Globalization of R&D and China.”

128 Yifei Sun and Ke Wen, “Country Relational Distance, Organizational Power, and R&D Managers: Understanding Environmental Challenges for Foreign R&D in China,” in Yifei Sun, Maximilian von Zedtwitz, and Denis Fred Simon, eds, Global R&D in China, London:

Routledge, 2009.

129 Walsh, “China R&D: A High-Tech Field of Dreams,” pp. 128–129.

130 Ibid., p. xv.

131 Ibid.