Decentralisation of R&D by ‘globalising’ corporations · 2010-08-27 · 3 Booz & Company Global Innovation 1000 (2008) Overseas expenditure by top corporate R&D spenders (2007)

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Innovation in China – some evidence fromforeign R&D centres in Shanghai

Seamus GrimesDepartment of Geography/ Centre for Innovation and Structural

Change,National University of Ireland, Galway

Debin DuDepartment of Urban and Regional Economics

East China Normal University, Shanghai

Decentralisation of R&D by ‘globalising’corporations

• MNCs becoming global corporations anddecentralising activities (including someHQ and also R&D) outside home countries

• Changing geography of market growth –emergence of China and India

Centre for Innovation & Structural Change, CISC

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Multinational firms, innovation and productivityCastellani and Zanfei (2006)

• Increasing importance of asset seeking activities of MNCs – accessto local knowledge

• Bridging initiatives – increasingly connect dispersed innovationsystems

• Tensions within MNCs between international dispersion andconcentration of innovative activities

• A shift in the literature from ‘transfer of MNC technology’ to theprocess of global knowledge creation and exchange

• MNCs need to combine internal networks of innovative subsidiarieswith external network of collaboration with foreign firms andinstitutions


Emerging countries

• Large, emerging countries, with significantmiddle class markets, cheaper and welleducated labour and stabilising political regimes(India, China, Brazil) no longer seen just as newmarkets for old products, but as significantlocations requiring reconfigurations of theeconomic geography of MNC operations.

• Not only do MNCs adapt products to localmarkets – local markets also provide ideas fornew global products (Buckley, 2009).


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Booz & Company GlobalInnovation 1000 (2008)

Overseas expenditure by top corporate R&Dspenders (2007)

Top 80 US $80.1bn of $146bnTop 50 European $51.4bn of $117bnTop 43 Japanese $40bn of $71.6bn


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Booz & Company GlobalInnovation 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 by22%

83% of new sites in China and India91% of additional staff in China and India2007: China a net importer of $24.8bn R&D from top 1000


A new geography of knowledge?Dieter Ernst (2009)

• Global centres of excellence in US, Japan andthe EU

• Advanced locations: Israel, Ireland, Taiwan andKorea

• Catching-up locations: Beijing, Yangtze RiverDelta, Pearl River Delta, Bangalore, Chennai,Hyderabad and Delhi

• New Frontier: lower-tier cities in China and India,plus Romania, Armenia, Bulgaria, Vietnam, etc


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Global Innovation Networks (GINs)Ernst (2009)

• ‘new frontier locations’: the main attraction– ample supply of low-cost, highlymotivated, and trainable engineers andtechnicians, willing to work long hours atlow pay in a highly-structured factoryautomation-type environment

• Constraints: limited exposure to modernUS style management systems


GINs

• Will improve access for MNCs to a limited poolof knowledge workers

• Scarce talent in an ageing world• MNC innovation systems being opened to

outsiders in a few select areas• Knowledge sharing the glue for GINs• A shift from IP barriers strategies to strategies

seeking to externalise IP through GINs


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Race for FDI: EU and ChinaOxelheim and Ghauri (2008)

• An UNCTAD (2005) survey of global firms on themost attractive locations for R&D:– China (61.8%), US (41.2%), India (29.4%), UK

(13.2%), France (8.8%), Germany (5.9%)– Ireland and Sweden (both 1.5%)

• 2004: EU surpassed for first time by developingworld ($233/$216bn) for FDI

• 2005: China No 3 for FDI after US and UK– Data on FDI to China needs to be interpreted

carefully


Branstetter and Foley (2007) Facts and fallaciesabout US FDI in China

NBER Working Paper 13470

• US affiliate activity in China is relatively modest and likely to remainmodest 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 onsupporting activity of parent

• China’s exports of high technology goods quite dependent onimported components, technology and expertise

• It will be many years before China is a significant exporter ofinnovative goods and services


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US R&D in Asian DCs

• R&D spending in Asian developingcountries as a share of global researchexpenditure of foreign affiliates of USMNCs growing fast

• Tripled from 3.4% in 1994 to 10% in 2002


A dynamic market with evidence of upgradingBrandt and Thun (2009)

• Battle between domestic and foreign firms for market• Domestic firms meet the demand for lower cost products, but rising

incomes and demand for better quality eroding this advantage• Pressure on foreign firms to capture a larger share of growing

middle market segments – accelerating the localisation of Chinaoperations

• Opportunities for domestic firms• Entry at both ends of the market important for upgrading process in

China• Very different from conventional export-led model – domestic firms

able to build capabilities and move into higher value-addedsegments of value chain


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A global technology power in next 10-15 years,if….

Hu and Jefferson (2008)

• If China succeeds in fortifying market institutions• Including its financial system• To allow more private resources to enter risky

ventures• And a more rigorous enforcement of IPR• And continues to promote openness to foreign

technology and investment• Then….


Gupta, A K and Wang, H (2009)Getting China and India Right

• 172. ..even fifty years from now, it is areasonable bet that 75 to 80 percent of theglobal demand for most products and serviceswill be outside China.

• 173: There is no reason that the establishedmultinational should cede any of this market toan aspiring champion from China or India.


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Challenges facing Chinese companiesBuckley (2009)

• Companies like Lenovo and TCL (TVs) take advantage of lowpurchasing power and inefficiencies of Chinese market

• Offer cheap versions of electronic products – Chinese consumerscannot afford higher quality foreign products

• Low profit margins – Chinese companies cannot afford necessaryR&D expenditure to create new products and brand

• Underdeveloped manufacturing and SCM skills

• Weak entrepreneurial and marketing skills• So they acquire weaker brands at higher prices as best way forward


China’s position as a major high tech exporterneeds to be qualified (OECD, 2008)

• Generally FIFs are less R&D intensive thandomestic firms (not specific to China)

• Pronounced differentials in some sectorscontributed to a perception that technologytransfer to China and related spillovers to thedomestic 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 challengeZizhu chuangzin

• Priority recently given to ‘indigenous innovation’• What does it mean?• Zizhu chuangzin (independent innovation) –

worries inside MNCs re definition – worries redrive to ‘absorb’ foreign technologies (Wilsdonand Keeley (2007)

• Estimated that only 15% of the value of China’selectronic and IT exports is added in China

• 50-70% of manufacturing costs of a Chinese PCrepresents license fees to Microsoft and Intel


A domestic standards regime to better capture theeconomic value from technological progress

techno-nationalism?

• R&D investment in ICT sector both technologyand demand driven

• Domestic technical requirements and standardsis why Motorola, Nokia, Microsoft and Ericssonwere among the first to establish extensive R&Dactivity in China

• China has become a major arena for globalcompetition among MNCs


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Chinese policy is technology-driven

• Despite the development of a market economy, the roleof 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 sophisticatedcustomers

• 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


Foreign R&D in China – some controversial issues(OECD, 2008)

• 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 governmentinitiatives


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The type of R&D performed(OECD, 2008)

• ‘doing R&D in China often seen as a way of building a market orgaining favour with the government’ (Wilsdon and Keeley, 2007)

• Market-seeking

• Short-term adaption to market

• Overall perception: most is development-focused rather thanresearch

• 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


Foreign R&D in ChinaBoutellier, Gassmann and Von Zedtwitz (2008)

Various sources: 2000: 34 foreign R&D units2002 822007 507

(Chinese Government figures say 750)2nd only to US for foreign R&D labsBut in 2007, the US was a net importer from top 1000 of

$108.5bn compared with China’s $24.8bnImpressive growth of foreign R&D in China, but still

relatively small


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Rationale for offshoring R&D(OECD, 2008)

• Initially MNCs shifted a significant part of theirmanufacturing 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 inChina

• Access to human resources a more importantdriver than market access, adaption of productsto market or support of export-orientedmanufacturing operations


Foreign R&D in ShanghaiMOST Survey 2006 + 2007 fieldwork

• 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&Dexpenditure in Shanghai

• 2006: 9.7bn RMB (USD 1.42bn)


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MOST SurveyShanghai 2006

• 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)


MOST SurveyShanghai 2006

• 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

• 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


R&D centres by functionMOST (2006)

• Tactical: early stage R&D centres for local productionand technical support – may evolve over time to moresignificant functions

• Global/Regional Centres: 33 in Shanghai – in 7 casesthey are the largest or only global R&D centre

• Many MNCs have relocated Asia Pacific R&D fromSingapore and Japan to Shanghai (Danisco, Dow)

• Upgraded centres: SAP to SAP Research Institute


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Conclusion

• Despite the rapid growth in foreign R&D centres in Chinaand Shanghai, many investments are modest

• While there has been some outsourcing of tasks fromHQ to Shanghai, and some contributions to globaloperations from Shanghai, the primary focus is on thelocal market and the Asia Pacific region

• The Chinese market has shifted from the earliercompetition (and monopoly) between MNCs with highmargins and major contracts to a new competition for therapidly expanding middle market of lower pricedproducts and lower margins.


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Conclusion

• Many MNCs see China as a very significantmarket in the future and the arena where theymust compete, not only with other MNCs, butwith a growing number of Chinese companies.

• Winning and maintaining market share in thisnew market will determine for some their abilityto compete globally.

• Thus R&D investment in China is part of growingwith this new market.


Documents

Decentralisation of R&D by ‘globalising’ corporations · 2010-08-27 · 3 Booz & Company Global Innovation 1000 (2008) Overseas expenditure by top corporate R&D spenders (2007)