1. Foreign R&D in China: Drivers, Dynamics, and New Directions by Kathleen A. Walsh Consultant Prepared for the Conference on “Global R&D in China” Nanjing, PRC May 27-30, 2005

2. Walsh - Conference on Global R&D in China 2 Evolution of Foreign High-Tech R&D in China DriversDrivers DynamicsDynamics Strategies (PRC and Foreign Investors’)Strategies (PRC and Foreign Investors’) ImplicationsImplications

3. Walsh - Conference on Global R&D in China 3 Official Figures Show a Steady Rise in Foreign R&D in China US DOCPRCG

4. Walsh - Conference on Global R&D in China 4 Source: Stimson Center Study (2003) Year 1 st R&D facility announced Rise in China R&D Appears Tied to IT Industry Boom … and Bust

5. Walsh - Conference on Global R&D in China 5 There Have Been Several Distinct Stages of Foreign R&D in China 1990 1995 2000 Exploratory & Strategic Partnerships Expansion Consolidation Source: Stimson Center Study (2003) 2005 Explosion ?

6. Walsh - Conference on Global R&D in China 6 Evolution of Foreign R&D in China Phase 1 ~ late 1980s–mid/late-1990s Exploratory and Strategic Partnerships Sino-Foreign Joint Ventures University Partnerships “Show R&D” Bohr ’ s Quadrant Stokes’ Matrix Edison ’ s Quadrant Pasteur ’ s Quadrant ? Quest for Fundamental Understanding? Deliberate Use Y Y N N

7. Walsh - Conference on Global R&D in China 7 Evolution of Foreign R&D in China Phase 2 ~ mid- to late 1990s Expansion Contract R&D / outsourcing – particularly to universities Training centers added “Go West” emphasis and incentives Product development: localization, upgrades, & system and standards integration Note: Took place during IT Industry boom; pre-WTO

8. Walsh - Conference on Global R&D in China 8 Phase 3 ~ late 1990s-early 2000s Consolidation WFOEs – more centralized facilities More advanced R&D objectives – moving toward “R” v “D” Closer relations with parent company MNC concerns over increasing costs Note: Took place during IT Industry bust; post-WTO entry Evolution of Foreign R&D in China

9. Walsh - Conference on Global R&D in China 9 Phase 4 ~ 2003-2005 + Explosion (?) Rising numbers of R&D investments gaining attention of PRCG and others … leads to interest in more statistics being gathered PRC and MNCs seeking new ways to exploit commercial R&D in China Rising cross-regional R&D collaboration, with China serving as hub Concerns grow over funding for basic R&D Evolution of Foreign R&D in China

10. Walsh - Conference on Global R&D in China 10 Implications for the Future China’s current foreign R&D investment trajectory is likely to remain positive, but it’s slope is dependent on several factors: Absence of a significant political / economic disruption Continued high economic growth rates Continued high levels of FDI to allow greater focus on basic R&D funding China’s Western development strategy

11. Walsh - Conference on Global R&D in China 11 Implications for the Future Phase 5 ? ~ 2005-2010 China achieves 2.0 % of R&D/GDP by 2010 “Go West” campaign resurges East Asian R&D consortium emerges as competitive force Greater levels and advanced forms of Chinese R&D appear overseas Increased emphasis on civil-military integration causes concerns abroad China gains recognition for innovation; wins first Nobel Prize