China is not your typical developing country--or is it? Those who have recently traveled to Beijing, Shanghai or Shenzhen have seen cities with Western-level infrastructure, Manhattan-like skylines, city-wide public transportation systems, and--last but not least--world-class R&D centers (1,2). The best of the best in China come to these cities, are educated with knowledge and textbooks developed at the best universities, and are willing to work very long and very hard to succeed. Consequently, when visitors return to their home countries, they are always impressed, and sometimes a little frightened, by the energy and determination that pervade this country.
Despite its recent achievements, however, China is still a developing country by any standard. Even though it is a country of 1.3 billion people, in terms of GDP it is only about the size of the United Kingdom (2005 GDP US$2.2 trillion). China's GDP has been growing nearly 10 percent per year since the early 1990s, with an average annual GDP per capita of US$1,710 (cf. average US$41,600). The industrialized world has a greater accumulation of wealth and--fundamentally linked to this--significantly greater investments in science, technology and R&D. By far the greatest share of worldwide R&D is done in the United States, Europe and Japan, and most of the cross-border R&D investments go into other industrialized countries.
It is difficult enough to do R&D at home; global R&D is much more difficult because team members do not speak the same language, do not have the same cultural background, do not have access to the same infrastructure, and/or do not work in the same time zone. Thus, setting up R&D in China--a country which has only recently opened up to the West, where intellectual property rights are harder to enforce, whose scientists and engineers speak Chinese predominantly, where expertise in modern technology is limited, and whose culture is often described as "the most different" from the West--brings about a special set of challenges.
Foreign China R&D Still at Early Stage
According to official numbers (collected by the Chinese Ministry of Science and Technology), by late 2005 foreign companies had established about 750 R&D centers, mostly in the telecommunications, IT and manufacturing sectors. How significant is this in terms of global R&D?
CNY197 billion, or 1.23 percent of China's GDP, was invested in R&D in China in 2004. Of the expenditure, 66.8 percent was spent by enterprises, with three-quarters of that amount by large and medium-size companies. Of this, 23.1 percent was invested by foreign companies, including those from Hong Kong, Macau, Taiwan (together 8.1 percent) and other countries (15.0 percent). In other words, R&D spending by large and medium-size foreign companies contributed about 11.5 percent of the total enterprise R&D spending in China.
This is roughly comparable to what foreign companies spend on R&D in the U.S. (15 percent). However, 11.5 percent of CNY197 billion is CNY22.6 billion, or about US$2.7 billion--hardly impressive given that a Microsoft or Pfizer alone spends more than US$8 billion. every year (3).
To cross-check this calculation, let us multiply the 750 R&D labs by an estimated 50 researchers per lab (most labs are actually much smaller and only a few number into the hundreds), multiply the result by an average annual salary of US$40,000 per researcher (about one-third of U.S. levels) and multiply this by 2 (as salaries, on average over most industries, account for about 50 percent of R&D costs). As a result, we arrive at US$3 billion estimated annual R&D investment in China.
Foreign R&D spending in China is thus still small, but rising with the influx of more foreign direct investment (about US$1 billion per week), the national 10 percent annual GDP growth rate, and the individual expansion of foreign R&D centers in China in size and numbers (see Figure 1). …