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Foreign Companies Accelerating R&D Activity in China

Jianmin Jin
Senior Fellow, Economic Research Center

May 13, 2010 (Thursday)

Foreign companies increasing R&D presence in China

In 2009, foreign companies (100% capital, joint venture, and contract-based) made up about 56% of China’s total exports, about 27% of total industrial production (value added base), and about 29% of total employees in industrial production. The strong presence of foreign companies in the Chinese economy is garnering attention domestically and abroad.

This presence, however, is not limited to exports and manufacturing: the R&D activities of these companies have already become an important component of overall R&D in China. As of the end of 2009, the number of independent R&D centers and R&D departments established by foreign companies has reached about 1,200. Of these, 460 R&D centers have been approved by the Ministry of Commerce or local governments with registered capital of US$7.4 billion and total investment reaching US$12.8 billion. Of the Fortune 500 companies worldwide, over 400 have launched R&D centers in China.

According to relevant documents, foreign companies accounted for 21% (2006) of all R&D centers in large and mid-sized manufacturing and 19% of the entire R&D workforce (2006). 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% in 2002 to 27.2% in 2008, and hold 29% of all invention patents in China.

Latest trends in Chinese R&D centers of major global companies

These R&D centers of foreign companies are concentrated in technology-intensive fields such as electronic communications, bio-pharmaceuticals, automobiles, chemical, and software. Major global companies such as Microsoft, IBM, Hewlett-Packard, Motorola, Intel, General Electric, 3M, Sun Microsystems, General Motors, DuPont, Proctor & Gamble, Pfizer, Siemens, Philips, Nokia, Ericsson, Volkswagen, Fujitsu, Panasonic, Hitachi, Nissan, Samsung, and LG Electronics began setting up R&D centers in China immediately after China’s membership in the WTO in the 1990s.

In recent years, 3G mobile communications (e.g. France Telecom and Docomo), automobile (e.g. GM, Nissan, and Hyundai), pharmaceutical (e.g. Roche, Lonza, Novartis, Sanofi-Aventis, AstraZeneca, and Merck Serono), and chemical (e.g. Dow, Exxon Mobile, and Bayer) companies have been attracting attention for the expansion and diversification of their centers through new and additional R&D investment. For example, Novartis announced in November 2009 that it will invest an additional US$1 billion over 5 years and expand its center in Shanghai into a global R&D center.

China is also characterized by a concentration of R&D centers from the same industries such as IT, automobile, pharmaceutical, and chemical. For example, cosmetic (e.g. L’Oreal, Proctor & Gamble, Unilever, Shiseido, Johnson & Johnson, Kanebo, and Kao) and global perfume (e.g. Givaudan and Firmenich of Switzerland, Symrise of Germany, IFF of the US, and Takasago of Japan) companies are concentrating their R&D centers in China.

Expansion into provincial cities is also accelerating. For example, foreign R&D centers now number 267 in Suzhou, a city near the Shanghai market that has traditionally been a manufacturing hub, and have been increasing at the rate of one center a month since 2009. In addition to coastal cities, R&D centers are also sprouting in inland areas such as Wuhan, Chengdu, Chungking, and Xian that offer stable and cheap human resources. The pharmaceutical giant Pfizer is utilizing human resources and pursuing clinical trial research in inland Wuhan, where it has established its second Chinese R&D center.

Departing from their traditional domestic focus, these centers are increasingly functioning as regional Asia-Pacific and even global centers. For example, Microsoft created “Microsoft Research China” in Beijing in 1998, upgraded it to “Microsoft Research Asia” in 2001, and opened the “Science and Technology Park” in Shanghai in 2010 as its global strategy research center outside of the US. Similarly, Sanofi-Aventis’ “China R&D Center” in Shanghai was expanded to the “Asia-Pacific R&D Center” to cover a wide area including Japan, Russia, and India. Meanwhile, Bayer Schering Pharma invested 100 million euros and launched a R&D center in Beijing in February 2009 and immediately placed it as its global center.

In this way, western and other foreign companies are beginning to comprehensively use China for not only low cost manufacturing and as an attractive market, but also for basic research and reverse innovation supported by high quality human resources. This trend is only accelerating in China, which achieved V-shaped recovery from the financial crisis.

Policy to attract R&D investment from foreign companies

Aiming to become an “innovative and creative nation,” China is encouraging the entry of foreign capital R&D through policy such as offering tax exemptions on equipment imports and government R&D subsidies; strengthening intellectual property protection; and giving preferential treatment to products developed domestically and independently (including by foreign companies) through government procurement.

The recognition China has received from foreign companies for improving its policy environment has led pharmaceutical and chemical manufacturers to expand into China despite worries over intellectual property protection. Japanese companies, however, have been slow to develop R&D activities in China because of concerns over intellectual property protection and high turnover of personnel.