Multi-National Companies' R&D Activities in China
June 23 (Friday) 2006
Jianmin Jin
Senior Research Fellow
SUMMARY
- According to the “World Investment Report 2005” announced at the September 29 meeting of UNCTAD last year, China ranked first as the most attractive location to establish R&D activities in the coming years as part of the globalization of R&D with 61.8%, followed by the U.S. with 41.2% and India with 29.4%.
- In actuality, the establishment of R&D organizations in China has come to be a major characteristic of multi-national companies' investment in China in recent years. According to statistics from China's department of commerce, there were 750 R&D centers and R&D bases established by foreign companies by the end of July 2005. Out of those, over 400 were established since January 2004. During the past five years, for example, Ericson has increased its amount of investment in research and development in China by an average of 30% each year; the projected increase for 2005 is an additional 50%. In April 2005 Lucent increased investments in its Nanjing-based 3G research institute by US$80 million, to a cumulative investment total of US$200 million. Nokia has also been increasing investments in R&D in China. Until recently Nokia had five research centers in China, but in anticipation of opening 3G services in China it built a sixth research center related to 3G in Chengdu in August 2005.
R&D activities in China have been mostly limited to the IT field up until now. Recently, however, R&D activities in China have expanded to include other fields such as automotive, chemical, biomedical/pharmaceutical and others. Methods of investment in these fields include building off of previous investments by adding investment funds for research at existing R&D centers and adding additional R&D bases, as well as creating new R&D centers. Furthermore, these sites serve as research project bases that promote joint research with local universities and national research centers. There are also cases like that of the electronics company Samsung, which is establishing four joint R&D centers with the Chinese Academy of Science. Additionally, some companies such as NTT Docomo and France Telecom are in the midst of developing research activities in China, despite not offering service operations in China itself.
Reasons for accelerated R&D investment in China by multi-national companies include: 1) A growing market and production base, 2) A large pool of science and technology graduates and R&D personnel (currently, there are approximately one million science and technology graduates a year and around 1.1 million R&D personnel, which is more than Japan), 3) Low employment costs, 4) Preferential policies by the government, 5) Efforts toward protecting intellectual copyrights as a result of membership in the WTO.
R&D Activities in China by European and U.S. Companies
Recently, the R&D activities of many companies in China have been gaining attention. These include 3G-related mobile communications companies like Nokia, Ericson, Alcatel, Lucent and Siemens, automotive-related R&D centers for GM China and Nissan, and R&D activities by pharmaceutical companies like Pfizer and Roche as well as by chemical companies like Dan Chemical, DuPont and others. Indeed, it can be said that market competition and the competition for human resources in China is starting in the Chinese-oriented R&D activities of multi-national companies.
Until now, many research and development bases have been designed for acquiring local markets or utilizing local resources. In recent years, however, the number of corporate-level research and development bases with global R&D capabilities has been increasing. Examples of corporate-level R&D bases include: GE China Technology Center (Shanghai), DuPont China Research and Development Center (Shanghai) and Microsoft Research Asia (Beijing). These facilities conduct both fundamental research as well as applied research for global markets.
The majority of European and U.S. companies' R&D facilities are located in the human resources-rich cities of Beijing and Shanghai. Recently, however, unity with production bases, stable talent and low costs have encouraged the opening of facilities in coastal cities such as Tianjin, Hangzhou and Guangzhou, as well as in more inland cities like Chengdu, Chongqing and Xian.
In order to strengthen the management of intellectual property rights, multi-national companies are showing a preference for 100% self-owned capital for R&D investment. For example, Motorola Chinese Research Institute (capital investment of US$155 million), Lucent Chinese Research Institute (capital investment of US$200 million), Microsoft Chinese Research Institute (capital investment of US$80 million) and IBM Chinese Research Institute are all 100% self-owned capital R&D centers. These companies ensure that R&D centers have a close relationship with their headquarters' management of intellectual copyrights division, establish local intellectual property right management sectors, conduct frequent educational programs for staff regarding intellectual property rights, and implement other institutional countermeasures. Further, on top of creating an intellectual property rights management system for appealing to the Chinese government or Chinese communities and for prioritizing the opening of new markets in China, there are also cases of multi-national companies merging with Chinese companies and establishing R&D centers. The Dutch company Phillips and France's SAGEM are both currently launching joint R&D centers with Chinese companies in Shanghai and Ningpo, respectively.
At many European and U.S. companies' R&D centers, management is left up to overseas Chinese who have study abroad experience. For instance, the R&D centers of Dupont, GE Medical and Novozymes have Chinese with study abroad experience at their top. These managers demonstrate advantages in early recognition of market changes, coordination with local universities and research institutions, human resources management and communication with the government.
In other words, Chinese-oriented R&D management by European and U.S. companies is characterized by being incorporated into global strategy, its integration with market development and production, institutional countermeasures for intellectual property and localized management.
Issues with Intellectual Property Rights and Securing Human Resources: Bottlenecks to Chinese-Oriented R&D Activities
For Japanese companies, fears of technology leaks and talent drain have sidelined substantive Chinese-oriented R&D activities. However, it seems that intellectual property issues such as technology leaks are confused with China's pirated and fake goods issues that are so often broadcasted by the media. According to local field surveys, in contrast to the field of manufactured products, no problems with R&D related intellectual property rights violations have been verified. Reasons for this include that, in contrast to the low value-added sector of technological development to which technology leaks are limited, leaks in R&D activities in China are comparatively difficult, intellectual property rights management is strict, and local R&D staff have higher morals than production site personnel.
At the same time, the issue of technology leaks is connected with talent drain. Local surveys confirm that personnel at European and American R&D centers have a turnover rate of 5-10%, which is lower than expected. This turnover rate is analogous to the rate in the U.S. and Europe. Human resources strategies such as for wages, career advancement, fair evaluations and other considerations are vital for stabilizing personnel. Dupont, GE and Novo's Chinese managers, for instance, are strongly loyal to their head companies. Japanese companies would do well to follow their lead and implement similar kinds of mechanisms.
