China’s Transition to Technology Creation: Challenges for Foreign Companies

made in china

By Dominique Jolly, Bruce McKern and George S. Yip

In this article the authors discuss the findings of their research into Research & Development centers set up by foreign companies in China, analysing their motivation, goals and challenges.

Despite the emergence of formidable Chinese competitors, there are still, surprisingly, major foreign companies that have no R&D centre in China, or only a few of their total R&D staff based there. These companies may be missing an important shift in the global competitive game. The Chinese system of innovation is now firmly on the world R&D map. All the necessary ingredients have been created: leading research universities, world-class public research centres, modern science and technology parks, a growing concern for intellectual property rights (as more and more Chinese companies need to protect their innovations) and a surge of companies investing in R&D. The Chinese share of the world’s top scientific papers is growing every year. As a result of all these investments, China has lodged since 2011 the world’s highest number of applications for domestic invention patents. In fields such as telecommunications equipment, photovoltaic panels or even construction equipment, China is now a recognised leader for technology creation.

Foreign companies that are not active in R&D in China are missing opportunities for innovation with applications not just in China, but globally. What can they do to benefit? What should be their driver for implementing R&D activities in China? Our research indicates that knowledge-driven R&D should be the target in many business sectors.

Our Research   

We studied 50 R&D centres established by foreign companies in China, mostly American and European, but also some Asian, operating in a range of sectors: chemicals, pharmaceuticals, automotive, IT, and others. A few of the R&D centres of our sample were launched more than 10 years ago. But most of them were set up in the last ten years. The large number of staff hired by those entities shows that those strategies are no longer incidental, but quite deliberate: 10 out of 50 have more than 1,000 employees; 25 have between 100 and 1,000 employees; only 15 have fewer than 100 employees. These entities are no longer simple support teams for factories and/or customers; they are true centres for research and development.

Motivations for MNCs’ R&D in China

These MNCs have various motivations for doing R&D in China. We distinguished three types of drivers: cost, market, and knowledge, as illustrated in Figure 1 below. Cost-driven R&D is more related to end of development work, supporting production and located close to the factory. Market-driven R&D adds primary product development to adapt products and services to Chinese market needs. Knowledge-driven R&D extends from primary development to applied research to fundamental research – a recognition of China’s emergence as a centre of innovation. At the level of any one R&D centre, MNCs in China have in the past put the emphasis on one specific driver. While many started with cost-driven R&D (9 out of the 50 companies we studied [18%] are almost exclusively doing cost-driven R&D), the dominant pattern has been market-driven R&D. 27 out of 50 companies (54%) are mainly in this category (Figure 1 below). But there is an evolution under way towards a new motivation: 14 out of 50 (28%) have engaged in knowledge-driven R&D, which we discuss below.


3 Rationales



Three Types of MNC R&D Evolution in China

MNCs pursuing cost-driven R&D in China launched these activities as a way to reduce their R&D labour costs – and also some operating costs such as the cost of facilities. Consequently, they focused on the most expensive part of the R&D process, i.e. development. None of them conduct research activities in China. And most of these companies are conducting only “end of development” activities, i.e. they are only weakly engaged in “primary development”. This group is dominated by industries requiring huge efforts for testing activities, such as software development. Some of those companies have several thousands of employees dedicated to ‘end of development’ in China. Examples are Ericsson or Nokia Networks.

Companies that implemented market-driven R&D realised that not all their technologies from developed countries could be transferred to China without changes. Adaptation is a great concern for industries demanding localisation so as to fit with local demand, to adapt to locally available resources, to comply with local regulations and to compete with Chinese firms that are masters at serving local needs. This strategy was clearly necessary for industries such as automotive, food, cosmetics, but also for construction materials. These companies have expanded the range of their R&D activities in China beyond ‘end of development’ to encompass “primary development” – but only rarely do they conduct applied research. For example, 95% of the total R&D staff of foreign automotive companies is employed only for development – leaving only 5% of the staff to work on applied research (and none for fundamental research).

A third category of companies has come to China to pursue knowledge-driven R&D. These companies see China as a hotbed for ideas with global applications and have recognised that they must be embedded in the local innovation ecology.

Finally, a third category of companies has come to China to pursue knowledge-driven R&D. A large part of this group comes from the pharmaceutical industry (6 out of 14, i.e. 43%), while others we studied are in chemicals and electronics. Their aim is to connect with the Chinese innovation system to extract the latest research output. In these companies, the full R&D spectrum is covered: development, applied research, and more and more frequently, fundamental research. These companies see China as a hotbed for ideas with global applications and have recognised that they must be embedded in the local innovation ecology. They target the pool of high quality researchers that have recently emerged in China, fostered by the significant numbers of returnees. They establish research partnerships with leading universities and public research centres and work with local partners and start-ups. Their goal is to be insiders in the local science and engineering community so as to create innovations for both China and the world.

The motivations of MNCs are evolving. First, several companies that initially came to China for cost-driven R&D have now switched to a market-driven R&D strategy, as China’s cost advantage has faded. Second, the group of companies establishing knowledge-driven R&D centres is the most recent and their numbers are growing significantly. Our interviews show that several companies currently doing market-driven R&D are planning to develop a knowledge-oriented focus. These companies will have to face three challenges.

Challenges to Creating Knowledge-Driven R&D in China

Locating the R&D center is the first issue. Knowledge-driven R&D needs to be physically close to recognised research universities and leading public research institutes, which are predominantly established in the coastal provinces. But these locations often don’t match with the right locations for cost-driven or market-driven R&D. Cost-driven R&D today requires moving into China’s interior, as the coast has become too expensive. But this is not where the best research institutions are. Market-driven R&D needs to be close to the customers. For example, equipment suppliers for the auto industry need their R&D centres to be close to the automakers’ factories, which are scattered across the country. So they need to disperse their R&D centres. And companies wanting to switch to knowledge-driven R&D need to be inside the innovation system, which means building a new facility inside or close to the technology parks, or adapting an existing one built for a different purpose.

Recruitment of people is the second challenge for foreign companies. Companies need staff that can interface with the Chinese scientific milieu. Challenges include needing to deal with local people with limited international exposure and with the “hukou” system, which constrains where Chinese can work. In this context, expatriates are no longer the key; returnees with foreign training and working experience are more valuable R&D leaders. But the most important challenge is to retain people. The labour market is so dynamic that turnover is very high – currently over 10% a year. This means that companies have to develop creative means to stabilise their teams. This depends less today on salaries – which have to be competitive – and more on ensuring opportunities for challenging and creative work.

Third, finding the right academic and business partners is a challenge for companies wanting to pursue knowledge-driven R&D. We met companies that devoted significant efforts to relationships in the entrepreneurial world of science and technology parks, universities and research centres, incubators, start-ups, and venture-capitalists, so as to identify valuable partners. This is not a one-time fix: it requires a sustained and credible commitment of people and resources.

Finally, managing intellectual property protection is a continuing challenge, increasingly so when a firm seeks to embed itself in the innovation ecosystem, but the regulatory landscape and strategies for protection are evolving quickly.

Benefiting from this emerging global powerhouse for science, technology and innovation is highly demanding for foreign companies. But the potential rewards are also high. Commitment to China’s innovation economic ecosystem is for many companies now a strategic necessity.

About the Authors

Dominique Jolly is a Professor at Webster University in Geneva, and Chair of the Walker School of Business & Technology.


Bruce McKern is a Visiting Scholar at CEIBS and former Co-Director of its Centre on China Innovation, former Visiting Fellow at Stanford University’s Hoover Institution, and Visiting Research Fellow at Oxford University and INSEAD.

George S. Yip is Professor of Strategy and Co-Director of the Centre on China Innovation at China Europe International Business School (CEIBS) in Shanghai. He is also Professor of Marketing and Strategy at Imperial College Business School in London.

Yip and McKern are the co-authors, and Jolly is a contributing author of China’s Next Strategic Advantage: From Imitation to Innovation, The MIT Press, April 2016.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of All China Review.

Comments are closed.