Presentation on theme: "Graduate University of Chinese Academy of Sciences,"— Presentation transcript:
1Graduate University of Chinese Academy of Sciences, The Role of Transnational Corporations in the National Innovation Systems – The Case of ChinaLi YanhuaGraduate University of Chinese Academy of Sciences,Beijing, ChinaAugust 20, 2009
2Opening-up and Innovation: China is Facing Opportunities and Challenges Hot topics in China, which may be or will be confronted with by other LDCsBe more open or be more self-reliance?How to develop from economic growth-oriented country to innovation-oriented country?How transnationals have played and will play in the technology innovation of domestic firms?How to cope with the opportunities and challenges under globalization?
3Objectives This paper: Focus on the role of TNCs in China national innovation systems, including recent evolution and perspectives.Give some implications for policymakers of large and fast growing economies.
4Outline Analytical framework and evolution of China’s NIS 1 The position and evolution of TNCs2The local factors affecting innovation by TNCs and local enterprises3The spillover of TNCs and linkages with local enterprises4Out-forward FDI and domestic TNCs5Conclusions and implications6
5Institutional Arrangement Analytical FrameworkGovernmentInstitutional ArrangementLocal FirmsForeign subsidiariesMultinational R&DUniversitiesDomestic R&DIntermediariesDomestic FinancingchannelsOverseas FinancingElementary education, Infrastructure, Basic R&D Platform and NISs PlatformNational innovation system with the participant of Transnationals
6The position and evolution of TNCs Overall trends: China has remained the largest FDI recipient among all developing economies, attracting $92 billion in 2008.Although there are many dissimilar opinions, strengthening the introduction of foreign capital is continuing without interruption.(100 millions of US dollars)
7The position and evolution of TNCs Industry distribution: Relatively stable, but more investment has been to capital-intensive or technology-intensive industries.20002006ManufacturingReal estateLeasing& business serviceelectric power, fuel gas and waterWholesale&retailTransport, storage and communicationsOthersFigure : Inward FDI stock, by industry, 2000, 2006 (percent)
8The position and evolution of TNCs sources of FDI: South, east and south east Asia has been the main region of inward FDI, accouted for 84% in Japan, United States are the main investors of developed countries.Figure 2: Share of main Investors in China, actually utilized FDI, 1995, 2005, 2008 (percent)
9The position and evolution of TNCs Effect of TNCs on economy:In a macro perspective, TNCs have promoted robust growth in all economic indicators (GDP, exports, investment, employment and R&D).One-third of industrial output, one half of export, a quarter of tax revenue comes from inward FDI.The effect of FDI in high-tech manufacturing industriesis more remarkable than other industries.Figure 2: Share of Top 10 Investors in China, actually utilized FDI, 1995 and 2005 (percent)
10The position and evolution of TNCs Effect of TNCs on economyAddedvalueExportEmploymentR&DexpenditureemployeesTechnologyimportpharmaceuticals232116221420Electronics andtelecom8193734238Computer andoffice equipments9599918264Medical equipmentsand instruments558836271933Table : The importance of Foreign Investment Enterprises in Chinese high tech industries, 2004, (Percent)Source: Lundin et al., 2006Foreign firms import high-tech components (e.g. advanced semiconductors, engineered plastics, and software) into their subsidiary plants for final testing, packaging before exporting them to their final market destinations.
11The position and evolution of TNCs Effect of TNCs on economyThe share of new product output and export of foreign companies is increasing in recent years. About 42% new product output come from foreign firms and the percentage in high-tech industry is more prominent.Manufacturing industryHigh-tech industryNew product outputNew product export19982744438119993252792000355783200138632002375359702003415878200442676888Table : The position of foreign companies in new product output and export, , (Percent)Source: Lundin et al., 2006
12The position and evolution of TNCs New trends: transition of investment strategiesMain motivationRank(2001)(Rank)2005Pursue more expecting profit31Develop manufacturing base2Extend market share in ChinaMaintaining competitive advantage of low cost4Compet with transnational competitors5Improve R&D capability in China76Follow with existing customersSource: Zhao jinghua, 2002, 2006Four kinds of strategical roles of TNCs’ subsidiary companies: manufacturing base, market exploiting, risk avoidance, knowledge acquisition.
13The position and evolution of TNCs New trends:Speeding up localizationStrengthening control to affiliatesAcquiring Chinese firms
14Local factors affecting innovation by TNCs Government policies towards TNCsThe Law on Sino-Foreign Equity Joint VenturesEquity-based joint ventures (JVs) were the dominant entry modeFavorable policy packages, non-national treatment to TNCs1993-Industry guideline for FDI, determine encouraged industriesPromoted middle&west investmet of FDIGrant the national treatment to TNCs
15Local factors affecting innovation by TNCs Government policies towards TNCsYearStagePolicyMain Sources of FDIIndustry distribution of FDIPrudentGradual opening-up and accumulation of experienceHong Kong, Macao, main SMEsThe tertiary industry, textile and ClothingActiveEncouraging exportation and introducing technologiesTaiwan, Japan and South KoreaMiddle and large-scale projects including energy, transportation, electronics and machineryAdjustedFDI industrial adjustment, emphasis on technologies, talents and managerial experienceLarge-scale TNCs of the Asia, U.S. and EuropeInfrastructure, basic industries and technology-intensive industries, modest opening-up of finance industry2001-More Deep and widlyPromoting indigenous innovation, learning from TNCsMore deep opening-up of all industries except individual ones (e.g. railway transportation)
16Local factors affecting innovation by TNCs 2001：Formal Entry into WTO2002：Category for Guidance for Foreign Investment Industries2004：Revise Category for Guidance for Foreign Investment Industries2007：Revise Category for Guidance for Foreign Investment Industries2008：Revise The law of People’s Republic of China on EnterpriseIncome Tax2001－ComprehensiveOpening-up1995：Revise Category for Guidance for Foreign Investment Industries1995：Category for Guidance for Foreign Investment Industries1997：Revise Category for Guidance for Foreign Investment Industries1999：Encourage technology development and innovation offoreign-funded enterprise1993－2000PositiveOpening-up1986：Provisions for The Encouragement of Foreign Investment1987：Interim Provisions on Guidingthe Absorption of Foreign Investment Direction1988：Law on Chinese Foreign Contractual Joint Ventures1990：Open the Pudong New Area of Shanghai1991：Rules for the Implementation of the Income Tax Lawfor Enterprises with Foreign Investment and Foreign enterprises1986－1992Active Opening-up1979：Law on Sino-Foreign Equity Joint Ventures1980：Open four special economic zones1984：Open fourteen coastal port cities1985：Establish economic open zones successively1978－1985Prudent Opening-upUnit: $ 100 MillionsFDIGDPFigure 3：Main Policies On Foreign Investment Of China
17Local factors affecting innovation by TNCs Government policies towards TNCssupportive policies for assimilating innovative foreign technologiesKey national projects are required to develop a plan to build indigenous innovation capacity by assimilating imported advanced technology.The list of technologies that are encouraged or restricted for import will be adjusted.Support innovations based on assimilation of imported advanced technologies by giving high priority to key national projects.Support cooperation among industries, universities, and research institutes as they assimilate imported advanced technologies.
18Local factors affecting innovation by TNCs The role of local universitiesThe extensive involvement of public research in industry R&D in China constitutes an important character of her National Innovation System.Most of resouces concentrate on national or local leading universities.Promoting science-industry cooperation has been a crucial innovation policy, but the effect is still unsatisfying.Joint R&D projects or organizations between TNCs and leading universities concentrate on more advanced R&D than domestic firms, beside this, talent development and training are also main functions.Local firms often lack abilities to compete with TNCs in signing such projects: crowding-out effect?
19Local factors affecting innovation by TNCs The role of local universitiesJoint R&D organizationsTNCsHome countryQinghua-BP Clean Energy Research and Education CenterBPU.K.Freescale Singlechip and DSP Applying and Development Research CenterMotorolaU.S.Qinghua-Toyota Research CenterToyotaJapanQinghua-Daikin Research CenterDaikinQinghua-AREVA Controlling Research CenterAREVAFranceQinghua- Mitsubishi Joint R&D centerMitsubishiQinghua- Renesas Integrate Circuit Designing research instituteRenesas TechnologyQinghua-Intel Joint R&D CenterIntelDelphi-Qinghua Auto System Research CenterDelphiQinghua-Tianshi Software R&D CenterHongkong TianshiHongkong, ChinaTable : Some Joint R&D organizations of Qinghua University with TNCs
20Local factors affecting innovation by TNCs Other factorsIPRSince China joined the WTO and signed the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS agreement), the Chinese patent system is in line with international standards.Still weak. Infringement of intellectual property rights, particularly of copyright and trademarks, remains a concern.
21Local factors affecting innovation by TNCs Other factorsEducation and S&T human resourcesChina has been the largest countries in terms of the number of enrolled undergraduates and post-graduates.Since the early 1990s China has made substantial progress in developing S&T human resources.The density of scientists and engineers engaged in R&D per million people in China is still relatively low
22Local factors affecting innovation by TNCs Other factorsEducation and S&T human resourcesTable : scientists and engineers in R&D personnel
23The spillover of TNCsThe role of TNCs remain controversial in China. The empirical evidence on whether FDI facilitates technology spillovers is ambiguous in China.Productive technology spilloversThere are positive productivity spillovers from foreign firms to their local suppliers in upstream sectors in China (e.g. Buck, Liu, Wei, & Liu, 2007; Buckley, Clegg, & Wang, 2002; Kueh, 1992; Li, Lam, Karakowsky, & Qian, 2003; Wu, 1999; Zheng, Siler, & Giorgioni, 2004; Zhu & Tan, 2000).Local firms have improved and expanded production capabilities rather than innovation capabilities.
24The spillover of TNCs Core or advanced technology spillovers When it comes to the effect of TNCs on domestic innovative technological development, the study proved not so optimistic.Auto production is almost fully carried out under license from foreign manufacturers. Most product development is based on reverse engineering, and no significant indigenous technological development has yet occurred.Table : scientists and engineers in R&D personnel
25The spillover of TNCs Training spillovers Mobility of trained labor is a very important channel for technology spillover in China.The main channel of TNCs’ technology diffusion is the mobility of human resources, especially senior managers and researchers, who came into domestic firms for development, or operated their own start-ups (R&D institute of Motorola in China).Table : scientists and engineers in R&D personnel
26The spillover of TNCs Linkages between TNCs and local firms Technical cooperationThe top 3 technical cooperation partners of TNCs is: parent company, clients, foreign suppliers (A survey performed to TNCs in Shanghai high-tech park,2007 ).75% TNCs didn’t set technology alliances with local firms, 67% TNCs had no intent to give technological support to local firms (A survey performed to 400 foreign companies ,2005 ).Some local companies with strong R&D abilities (like Huawei, Haier, Chang’an and Little Swan) have cooperated with TNCs in recent years to form positive and interactive know-how exchange.
27The spillover of TNCs Linkages between TNCs and local firms CaseⅠ: Knowledge transfer between local suppliers and TNCsCityWuxi Citythe most important integrated circuit design and manufacturing centers in China;has attracted prestigious foreign firms, such as Siemens, Panasonic, Toshiba, Sony, General Electric, etc.Industrythe electrical and electronicsAttracted the highest amount of FDI with a growth rate of 25% annually;the demand for parts/components from suppliers is significant.Dataa survey distributed to 50 TNCs, by Duanmu and Fai (2007)
28The spillover of TNCs Linkages between TNCs and local firms CaseⅠ: Knowledge transfer between local suppliers and TNCsFindings:56% firms have purchasing arrangements with suppliers in China, only 23.7% suppliers were indigenous Chinese firms; the others (76.3%) were foreign suppliers.Demonstration effect: FDI introduces an “existing proof” of viable paths of development. Imitation usually happened.There are technology spillovers between backward linkages from TNCs to local suppliers, but the transferred knowledge are mainly basic managerial and technological knowledge.Knowledge transfer are mainly one-way pattern that mostly dominated by the TNCs, interactive transfer is seldom.
29The spillover of TNCs Linkages between TNCs and local firms CaseⅠ: Knowledge transfer between local suppliers and TNCsFindings:knowledge transfer between TNCs and local suppliersStageKnowledge typeKnowledgeLinkagesinitiating stageBasic codified informationProduct blueprints and manualsDominated by the TNCdeveloping stageManagerial knowledgeBusiness cultureQuality control, product cost controls, materials management, etcintensifying stageTacit knowledgeJoint problem solving , CooperationInteractive knowledge transfer
30The spillover of TNCs Linkages between TNCs and local firms CaseⅠ: Knowledge transfer between local suppliers and TNCsFindings:The relationship is mainly determined by local suppliers’ capability and TNCs’ strategy. Technically, the gap between the two is huge as Chinese firms lack sophisticated technological knowledge.The nationality of the TNC: Japanese TNCs are more passive in their assistance to the suppliers whereas American and European firms seem to be more proactively.
31The spillover of TNCs Linkages between TNCs and local firms CaseⅡ: Linkages in the industry culsterSuzhou industry cluster:A quite typical industry cluster in China’s manufacturing landscapeThe driving power of the cluster is large-sized TNCsExport orientation, very open.Suzhou new development parkSuzhou industrial gardenEstablishing time19901994GNP (up to 2002)20.4 billion RMB25.2 billion RMBInward FDI (up to 2002)7.1 billion US dollars5.43 billion US dollarsRepresentative industriesComputer assemblySemiconductor IC industry
32The spillover of TNCs Linkages between TNCs and local firms CaseⅡ: Linkages in the industry culsterFindings:The entrance of TNCs promoted the forming of industry cluster in Suzhou.Great contribution to local employment (more than 80%) and labor training.The cooperation and backward linkages between foreign and domestic firms is unsatisfying. Low local procurement levelInnovative activities of MNCs: recipient and user of technologies according parent companyDomestic firms: Manufacturing capability has been developed, innovation capacity is still limited
33The spillover of TNCs Linkages between TNCs and local firms CaseⅡ: Linkages in the industry culsterFindings:TNCs have hold the upper-end of value chain in IT and semiconductor industry, local companies are still competing in the lower value chain excepting some fast learning firms.Suzhou new development parkSuzhou industrial gardenIndustryIT manufacturingSemiconductorValue ChainElectronic components, computer equipment, digital productsIC design, production, packaging and testingKey PlayerBenq (Taiwan), Logitech (Switzerland), Siemens (Germany), Panasonic (Japan), Yamaha (Japan), Philips (Holland)IC Design: Innosis, ESMT, VeriSilicon, AMD (United States)Packaging and Testing: Samsung (Korea), Hitachi (Japan), Fairchild Semiconductor (United States)
34The spillover of TNCs R&D activites in China China is now the most promising R&D investment destinations for TNCs, topping the United States and India (A.T.Kearney 2006 and UNCTAD 2005).R&D institutes: 200 in 2001, 1160 in 2006Motivation: make use of a growing pool of skilled engineers and technicians to cut their research expendituregovernment pressure
35The spillover of TNCs R&D activites in China Some R&D centers invested in China by TNCsICT industryBiopharmaceutical industryAutomobile IndustryIBMAstraZenencaShanghai GMSunNovo NordiskShanghai VolkswagenNokiaEli LilyNissanEricssonRocheDaimler ChryslerMicrosoftDSMHondaFujiLonzaToyotaMotorolaGEHyundaiHPSiemens
36The spillover of TNCs The negative role of FDI Industry Control & market monopolyForeign firms have introduced leading-edge, branded products that many Chinese vastly prefer to those made by domestic firms.90% of China’s export has been foreign brands or OEM.Top 5 companies in every industries that has been opened are almost foreign firms
37The spillover of TNCs The negative role of FDI Industrial Control & market monopolyThrough joint venture, many domestic brands have vanished and become OEM plants of TNCs.Beverage: 7 of 8 domestic brands have vanishied, which have changed to produce Coco cola or Pepsi cola.Cosmetics: almost all primary brands are foreign brands.Others: Camera, Bicycle, Cleaning product, Auto……
38The spillover of TNCs The negative role of FDI Crowding-out effect Industrial structure similarity coefficient of FDI: in 1985, in 1995More fierce competitionIf TNCs introduce more new technology and products to China, rather than invest in exsisting manufacturing industries, crowding-out effect will decrease.
39The spillover of TNCs The negative role of FDI Technical control Utilizing advanced technology to control high-end marketBuild production base through joint venture, call off R&D centers of Chinese partnersLocal firms are more dependent on TNCs technologyBrain drain of R&D talents
40Out-forward FDI and domestic TNCs General trendChina’s outflows increased to $52.15 billion (include offshore financial investment) in 2008, and its outward FDI stock reached $170 billion.521.52008Source: Ministry of Commerce of China, 2008
41Out-forward FDI and domestic TNCs General trendIndustry distribution: Wholesale & retail, Trade related services, Transport and storage, Mining, ManufacturingDestination: main to developing economies in Asia and Latin America, but the investment in developed countries has increased.Top 15 destination of Chineses outward FDI, by stock, up to 2007 (100 millions of dollars)RankCountry/ areaValueShare to all1Hongkong687.858%9Korea12.11%2Cayman Islands168.114%10Pakistan10.73British Virgin lslands66.36%11England9.54U.S.18.82%12Macao9.15Australia14.413Germany8.56Singapore14South Africa7Russia14.215Indonesia6.88Canada12.5Subtotal996.585%Total1179.1100%
42Out-forward FDI and domestic TNCs Local TNCsChina has 3429 parent companies in 2005 (UNCTAD, 2006).Most of them are relatively small TNCs with a limited geographical reach.But the number of large TNCs is on the rise.M&As (mergers and acquisitions) has become a major mode of entry into developed-country markets by TNCs from China.
43Out-forward FDI and domestic TNCs Local TNCsTypical outward FDI cases deals by Chinese TNCs to developed economiesYearLocal TNCsInvested projectHost economyEntry modeFDI value1986CITICWood and wood productsU.S.JV40 millions of RMBPaper and paper productsCanadaM &As,50% share60 millions ofCanada dollars1987CMIECMiningAustralia1999HaierHousehold electronic appliancesWholly owned2001HualiMobile communicationM &As$1 million2003CNOOCNatural gasGreat Britain$0.615 billionTCLTV, DVDFrance0.3 billion Euro dollars2004LenovoPersonal computer$ 12.5 billion
44Conclusions and implications FDI has been a crucial role in China’s development (GDP, industry structure, employment, export, technology import)Opening-up is a effective channel for the learning of latecomersMost technical standard are holded by TNCsOnly by learning, can latecomers catch the opportunity for shorten technology gap with developed countries.Many Chinese firms have accumulated productive, managerial, and R&D knowledge through demonstration effect, competition effect, or direct and indirect learning from TNCs.
45Conclusions and implications BUT:Technology spillover is unsatisfactoryCooperation between TNCs and other parts of NIS is limitedTechnical linkages between TNCs and local suppliers are limitedProductive capability has been significantly improved, but not the innovative capabilityNegative effect of TNCsLacking of absorptive capacity or unwillingness to learn through technology import or joint venture with TNCs, is a main reason for low innovative capability of Chinese firms.
46Conclusions and implications Main mode of Joint ventrue in China is based on capital or land, and is wholly owned by TNCs. Such mode will be very effective for the country that lack of capital and experience, but its marginal effect will decrease with the increasing capital size of inward FDI.Nowadays, improving innovative ability of firms should be a main objective through FDI for developing economies in international situation.So, how to design FDI policies and made them adaptive to constantly changing of situation?
47Conclusions and implications Improving impartial competition environment for domestic and foreign firmsFocusing on the investment in strategic industries, guiding the flow direction of FDIFacilitating technology transfer through linkages, promoting transnational technical cooperationBuilding local firms’ absorptive capacities, make enterprises to be the main body of NIS, not the publich research system.Learning to compete in international rules