Long Guoqiang & Zhang Liping

This research group has recently made an in-depth investigation of 11 multinational R&D institutions based in Beijing and Shanghai and conducted discussions with more than 30 R&D institutions. Our investigation reveals that multinational companies have intensified their China-based R&D activities since 2004 and some major positive changes are taking place in the areas of scale, human resources and R&D contents. China's governments at all levels should seize this trend and fully tap the technological spillover effect of these institutions.

I. New Changes in China-Based Multinational R&D Activities

China approved the establishment of the first-ever wholly foreign-owned R&D institution in 1993. After an early try, more foreign-invested R&D institutions entered China and showed some major positive changes since 2004.

First, the scale of China-based multinational R&D institutions has expanded rapidly. The average workforce of these institutions has increased from a dozen to nearly 100, with some of them employing several thousand people. Their R&D inputs have also continued to grow with the increase of personnel. The investment of the largest foreign-funded R&D institution is as high as 1 billion dollars.

Next, the level of R&D has risen rapidly. The China-based R&D activities of multinational companies are no longer limited to adapting to local customers; many institutions have carried out high-end R&D activities targeted on global markets. They include production technologies, new products and basic researches. Some multinationals have closed their R&D centers in developed countries and relocated them to China.

Third, the status of China-based R&D institutions within multinational companies has continued to rise. Many of these institutions have become global R&D centers and their influence over the R&D directions and decisions of their parent companies has also continued to rise.

Fourth, the qualifications of R&D personnel have continued to improve. Most of the R&D personnel of the China-based R&D institutions are Chinese. These companies have not only recruited a considerable number of top-level personnel from abroad to lead their R&D activities, but also trained a great number of local personnel through planned overseas training and work and through international exchanges. Some of local personnel can compare with their foreign peers in terms of technological level and R&D ability. As the time goes by, more local personnel will become world-class R&D leaders.

II. Multinational R&D Institutions Have Great Technological Spillover Potential to Be Tapped

The China-based R&D activities of multinational companies have greatly elevated China's R&D capacity and level as a whole. While these institutions have recruited or trained a large number of top-level R&D personnel, some institutions have cooperated with local institutions. This has helped expedite the industrialization of TD-SCDMA and other proprietary technological standards and boost local R&D capacity. Overall, multinational R&D institutions have clearly higher levels and capacities than their local peers do. Due to diverse reasons, their technological spillover has not been fully tapped.

1. Channels Are Unsmooth for Technological Spillover of China-Based Multinational R&D Activities

International experience indicates that multinational R&D activities can have technological spillover to host countries through the following channels: the leading effect on the technological development of upstream and downstream enterprises, the demonstration and competition effect on enterprises in the same sectors, and the knowledge spillover effect arising from personnel flow, training and cooperation with other research institutions. Currently, multinational R&D institutions in China have more personnel inflow than outflow. Many companies deliberately reduce the outflow rate of their R&D personnel, and the flow of these personnel mainly occurs between multinational companies. While joint R&D activities between multinational companies and local enterprises and academic institutions are still few, multinational companies also find it difficult to participate in government research projects.

2. China-Based Multinational R&D Levels Are Still Lower Than in Developed Countries

The higher the level of multinational R&D activities is, the greater the technological spillover effect to host countries is. Currently, the levels of multinational R&D activities in China are still lower than in developed countries though they have become far higher. There are three reasons. One, the time of China-based foreign-invested R&D institutions is relatively short. An institution's R&D capacity and level are determined by its accumulated R&D experience. While the longest China-based R&D activities are only more than 10 years, the R&D activities of their parent companies date back to dozens of years and even a century. Two, the top-level personnel still can not compare with their peers in developed countries. Although China-trained personnel excel their counterparts in other countries in terms of learning ability and work diligence, they cannot compare in terms of communication and innovation ability. Three, China's advantage in R&D cost is shrinking rapidly. Due to rising human and land costs, higher import tariffs of R&D equipment and samples, higher personal income tax rates for R&D personnel and inadequate fiscal support for foreign-invested R&D activities, China's R&D cost is not only higher than in India and East Europe, but also is close to the "four little dragons" including Singapore. The cost advantage over developed countries is shrinking rapidly. Four, some multinational companies still have misgivings about China's intellectual property protection and enforcement.

3. There Are Diverse Policy Barriers to Technological Spillover of Multinational R&D Activities

One, some differential policies designed to encourage indigenous R&D activities have weakened the senses of recognition and belonging of multinational R&D institutions. The senior officials of some multinational companies have misgivings about the direction of China's foreign investment policy. They dare not and are reluctant to relocate their higher levels of R&D activities to China. Two, the existing policies have made it difficult for foreign-invested enterprises to participate in government research projects and to receive government funding support for R&D activities. Three, the household register and social security systems regarding alien and non-local R&D personnel impede personnel attraction and flow. Four, China still has no complete and sound customs facility measures for international R&D activities and has customs barriers to R&D equipment and especially second-hand test equipment, expendables and samples.

III. Policy Proposals

1. Define policy goals. Multinational R&D institutions constitute an important force for China to become an innovative country. The policy on foreign-funded R&D should be designed to attract multinational companies to relocate higher levels of R&D activities to China and to further tap the technological and knowledge spillover effect of multinational companies.

2. Create globally competitive environment for R&D investment. Internationalizing multinational R&D activities is a world trend, which can bring opportunities for many late-coming countries to elevate their R&D levels. Accordingly, many countries have worked hard to attract foreign-invested R&D institutions with policy incentives. International competition has been exceptionally fierce in attracting foreign-invested R&D institutions. In this respect, China enjoys advantage in market scale and potential, infrastructure and human resources. But it has disadvantages in policy environment, fiscal input, intellectual property protection and trade facility. Therefore, China should tap advantages and overcome disadvantages and work hard to create a world-rate environment for R&D investment.

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