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The Changing Chinese Market
by Winter Casey
Experts say that China is experiencing a rapid rise in entrepreneurs but differ as to whether more U.S. technology companies are doing more innovation in China. Meanwhile, research and development in the country continue to grow.
China is looking to increase innovations, experts said, adding that research and development centers are taking on more tasks and that a shift toward privatizing is aiding entrepreneurship.
Scott Kennedy, a professor at Indiana University, does not consider the news alarming. "Almost every Chinese effort to promote homegrown innovation has involved cooperation with multinationals," he said. Kennedy said "it appears that we are beginning to see multinationals set up R&D centers in China that are actually part of their global R&D programs."
A few years ago the centers were primarily created "for payment to get into the China market" with limited funding and expectations, Kennedy said. Now they are utilizing the centers with both foreign and Chinese talent, and working more on "core technologies," he said.
The Pros And Cons Of Chinese Innovation
Kennedy said the increase of R&D centers in China, as well as the jump in Chinese technology exports, is positive. Most concerns relate to "dual-use technology used for military purposes, but for other technology there is room for collaboration with foreign companies," he said.
However, according to a report prepared for Congress by the U.S. China Economic and Security Commission in November 2005, the United States should be alarmed.
The commission said China's moves for technology standards create serious market barriers and "do not reflect market competition, industry preference, or consumer choice." The commission further warned of "industrial espionage" by China and accused the country of using researchers and students to gather confidential information from foreign companies.
"China has been able to leapfrog in its technology development using technology and know-how obtained from foreign enterprises in ways other developing nations have not been able to replicate," the commission said.
Jonathan Huneke, a vice president at the U.S. Council for International Business, said "global companies are looking to innovate in as many locations as possible."
James Andrew Lewis, a director with the technology program at the Center for Strategic and International Studies, does not think companies are doing more initial innovation in China but anticipates change. "In terms of innovation, the Chinese have a long way to go," Lewis said. "More than three-fourths of China's high-tech exports are based on foreign [intellectual property] and made by foreign companies."
Still, "the share of output from private enterprises in China is increasing," he said. The government still owns many companies there, but the figure has been dropping. Lewis said many times there is a strange mix in China of a private company with a government ministry or association owning the stock.
"The government still has a major role in shaping investment, but this investment now often goes to private companies, which are more productive than the ones directly run by the state," he said. "The state is moving from being an owner/operator to an investor."
Kennedy said the "commanding heights of the economy are still controlled by the state." Those include the telecom and energy sectors.
Signs Of Growth -- And A Big Obstacle To More
Last month, Chinese Vice Minister of Commerce Wei Jianguo said that by 2010, home-grown innovations will comprise 20 percent of China's total export volume for mechanic and electronic products. At the same time, high-technology products are expected to total 55 percent of the country's exports in those areas.
China has looked to encouraged domestic innovation. The country "has declared education and science and technology to be the strategic engines of sustainable economic development," according to a National Science Foundation report released this spring. "In 2004 China was the world's largest recipient of foreign direct investment. ... China's international patenting and publishing activities are fast increasing."
In 2003 domestic production by China's high-technology industry accounted for an estimated 9.3 percent of global value added, and its global high-technology industry exports hit 7 percent, according to the report. European Union Trade Commissioner Peter Mandelson said this month that cheap imports from China have saved U.S. consumers and manufacturers billions of dollars.
Meanwhile, the latest statistics from the Bureau of Economic Analysis present a decrease in U.S. direct investment in China from 2001 to 2002 but a jump in India during the same time. That was because at the time, some felt investment in China was too great, Lewis said.
The U.S. China Economic and Security Commission also found in 2005 that China had "made virtually no discernable improvement in" enforcing intellectual property rights.
Huneke said poor IP protection can be one of the biggest disincentives to high-end foreign investment. But "both governments and foreign business groups are reaching out to help governments improve protection," he said. He also said his group is involved in efforts to improve IP protections by enlisting the help of local business communities that "we hope will make China and other countries even more attractive destinations for R&D."
Many EU and U.S. officials repeatedly speak of the need for China to strengthen IP protections. Some experts also point to a greater awareness of IP in China. The "overall trend is greater application for patents," Kennedy said. The number of patents filed in China and the number of Chinese companies applying for patents in the United States have been growing, he said.
NSF has noted more tech sophistication in Asian patent filings. Chinese companies also are hiring more law firms to help, Kennedy said. "IP-consuming industries far outweigh IP-producing industries," he said, but there is gradual movement.
R&D Sector Takes Root In China
According to a Chinese government portal, multinationals created more than 200 R&D institutions with local universities in China by the end of 2005. Companies such as IBM, Microsoft, Motorola, and Procter & Gamble reportedly have expanded their R&D operations in China.
"Joint research institutions are no longer about public relations and enhancing the image of a company in China but for real research," said Xue Lan, a professor at Tsinghua University in Beijing. Xue expects more joint R&D programs in the future.
The portal also reported that close to 750 foreign-funded R&D centers currently operate in China. NSF found that R&D spending by U.S.-based multinationals is increasing in Asia, and according to the Organization for Economic Cooperation and Development, Chinese R&D spending reached $84.6 billion in 2003.
Experts said universities are attractive partners for U.S. companies because they place them in a more favorable position with the Chinese government. The alliances also provide inexpensive talent.
China, meanwhile, has placed an emphasis on encouraging more of its students to study abroad. Indiana University announced last week that it plans to collaborate with Tsinghua University on technology research.
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