Managing Foreign R&d in China

Article excerpt

Managers of international R&D and innovation in China relate the lessons they have learned: what works and what doesn't.

OVERVIEW: China has become one of the most desired locations in which to do R&D. However, it has little innovation of its own, and intellectual property protection is weak. This raises questions: Is China R&D more hype than reality? Do cost advantages really outweigh the risk of losing technology to Chinese competitors? Lessons learned from managing R&D in China show that in order to avoid the typical pitfalls of managing R&D in a developing country, any China-based R&D must be part of an overall China strategy and must also be part of a global R&D effort.

KEY CONCEPTS: international R&D, emerging economies, management in China.

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). …