The Chinese market and its consumers and their likely influence in the global economy in the near future are the greatest drawcards, especially in the information technology sector. The dimensions and competitiveness of the Chinese mobile phone market, for example, means it naturally has the potential to become a source of global innovation.
Chinese engineers are also relatively cheap compared with much of the rest of the world. And politically speaking, “window dressing” R&D centres no longer work for multinationals.
In a sense, foreign firms are simply tracking industry trends in China. R&D spending overall in China “has increased at a stunning rate of 19 per cent a year since 1995, and reached $30bn in 2005, the sixth largest in the world,” the OECD says.
Patent applications are doubling every two years. The R&D-to-gross domestic product ratio has doubled in a decade, during a period of spectacularly strong economic growth, to 1.34 per cent in 2005, from 0.6 per cent 10 years earlier.
The multiple barriers to foreigners investing heavily in genuine R&D in China are much the same as the disincentives that have held up innovation in China itself, in spite of the drive by the government to lift the country’s indigenous technological prowess.
An uncertain legal system that offers poor protection for intellectual property, a lack of experienced professionals and a frail financial environment in which banks are most comfortable lending to state enterprises have all undermined innovation.
The recent ramp up in R&D by foreign firms has been so pronounced that it has even produced a backlash from locals, who see multinationals crowding out local firms in the search for talent.
China also feels hemmed in by foreign domination of technology-standard setting and the valuable licensing fees that can flow from that.
“Foreign firms are seen as dominating standards and technological platforms and reducing Chinese companies to the role of producers with low profit margins,” the OECD says.
Conversely, the decision by multinationals to begin to spend serious money on R&D in China has brought a backlash in their own countries, especially in Europe and the US, which worry that such investments will be made at their expense.
For a template on such tensions, there is no better example than Germany. Angela Merkel, the president, who is visiting China this week, has complained strongly to Beijing since taking office about firms investing in China being forced into technology transfers. Partly as a result, relations between the two countries have cooled.
Origin: The Financial Times
