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The Role of Transnational Corporations in the National Innovation Systems – The Case of China Li Yanhua Graduate University of Chinese Academy of Sciences,

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Presentation on theme: "The Role of Transnational Corporations in the National Innovation Systems – The Case of China Li Yanhua Graduate University of Chinese Academy of Sciences,"— Presentation transcript:

1 The Role of Transnational Corporations in the National Innovation Systems – The Case of China Li Yanhua Graduate University of Chinese Academy of Sciences, Beijing, China August 20, 2009

2 Opening-up and Innovation: China is Facing Opportunities and Challenges Hot topics in China, which may be or will be confronted with by other LDCs –Be 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?

3 Objectives 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.

4 Outline The position and evolution of TNCs The local factors affecting innovation by TNCs and local enterprises The spillover of TNCs and linkages with local enterprises Out-forward FDI and domestic TNCs Conclusions and implications Analytical framework and evolution of China’s NIS 6

5 Analytical Framework Government Institutional Arrangement Local Firms Foreign subsidiaries Multinational R&D Universities Domestic R&D Intermediaries Domestic Financing channels Overseas Financing channels Elementary education, Infrastructure, Basic R&D Platform and NISs Platform National innovation system with the participant of Transnationals

6 The position and evolution of TNCs Overall trends: China has remained the largest FDI recipient among all developing economies, attracting $92 billion in Although there are many dissimilar opinions, strengthening the introduction of foreign capital is continuing without interruption. (100 millions of US dollars)

7 The position and evolution of TNCs Industry distribution: Relatively stable, but more investment has been to capital-intensive or technology-intensive industries. Figure : Inward FDI stock, by industry, 2000, 2006 (percent) ManufacturingReal estateLeasing& business service electric power, fuel gas and water Transport, storage and communications Wholesale&retail Others

8 The 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)

9 The 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)

10 The position and evolution of TNCs Effect of TNCs on economy Table : The importance of Foreign Investment Enterprises in Chinese high tech industries, 2004, (Percent) Source: Lundin et al., 2006 Added value ExportEmploymentR&D expenditure R&D employees Technology import pharmaceuticals Electronics and telecom Computer and office equipments Medical equipments and instruments Foreign 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.

11 The position and evolution of TNCs Effect of TNCs on economy Table : The position of foreign companies in new product output and export, , (Percent) Source: Lundin et al., 2006 Manufacturing industryHigh-tech industry New product output New product export New product output New product export The 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.

12 The position and evolution of TNCs New trends: transition of investment strategies Main motivation Rank (2001) (Rank) 2005 Pursue more expecting profit31 Develop manufacturing base22 Extend market share in China13 Maintaining competitive advantage of low cost44 Compet with transnational competitors55 Improve R&D capability in China76 Follow with existing customers67 Source: Zhao jinghua, 2002, 2006 Four kinds of strategical roles of TNCs’ subsidiary companies: manufacturing base, market exploiting, risk avoidance, knowledge acquisition.

13 The position and evolution of TNCs New trends: Speeding up localization Strengthening control to affiliates Acquiring Chinese firms

14 Local factors affecting innovation by TNCs The Law on Sino- Foreign Equity Joint Ventures Equity-based joint ventures (JVs) were the dominant entry mode Favorable policy packages, non-national treatment to TNCs Industry guideline for FDI, determine encouraged industries Promoted middle&west investmet of FDI Grant the national treatment to TNCs Government policies towards TNCs

15 Local factors affecting innovation by TNCs Government policies towards TNCs YearStagePolicy Main Sources of FDI Industry distribution of FDI Prudent Gradual opening-up and accumulation of experience Hong Kong, Macao, main SMEs The tertiary industry, textile and Clothing Active Encouraging exportation and introducing technologies Taiwan, Japan and South Korea Middle and large-scale projects including energy, transportation, electronics and machinery Adjusted FDI industrial adjustment, emphasis on technologies, talents and managerial experience Large-scale TNCs of the Asia, U.S. and Europe Infrastructure, basic industries and technology- intensive industries, modest opening-up of finance industry 2001-More Deep and widly Promoting indigenous innovation, learning from TNCs Large-scale TNCs of the Asia, U.S. and Europe More deep opening-up of all industries except individual ones (e.g. railway transportation)

16 Local factors affecting innovation by TNCs Figure 3 : Main Policies On Foreign Investment Of China 1979 : Law on Sino-Foreign Equity Joint Ventures 1980 : Open four special economic zones 1984 : Open fourteen coastal port cities 1985 : Establish economic open zones successively 1978 - 1985 Prudent Opening-up 1986 - 1992 Active Opening-up 1986 : Provisions for The Encouragement of Foreign Investment 1987 : Interim Provisions on Guiding the Absorption of Foreign Investment Direction 1988 : Law on Chinese Foreign Contractual Joint Ventures 1990 : Open the Pudong New Area of Shanghai 1991 : Rules for the Implementation of the Income Tax Law for Enterprises with Foreign Investment and Foreign enterprises 1995 : Revise Category for Guidance for Foreign Investment Industries 1995 : Category for Guidance for Foreign Investment Industries 1997 : Revise Category for Guidance for Foreign Investment Industries 1999 : Encourage technology development and innovation of foreign-funded enterprise 2001 : Formal Entry into WTO 2002 : Category for Guidance for Foreign Investment Industries 2004 : Revise Category for Guidance for Foreign Investment Industries 2007 : Revise Category for Guidance for Foreign Investment Industries 2008 : Revise The law of People’s Republic of China on Enterprise Income Tax 1993 - 2000 Positive Opening-up 2001 - Comprehensive Opening-up GDPFDI Unit: $ 100 Millions

17 Local factors affecting innovation by TNCs Government policies towards TNCs supportive policies for assimilating innovative foreign technologies – Key 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.

18 Local factors affecting innovation by TNCs The role of local universities The 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?

19 Local factors affecting innovation by TNCs The role of local universities Joint R&D organizationsTNCs Home country Qinghua-BP Clean Energy Research and Education Center BP U.K. Freescale Singlechip and DSP Applying and Development Research Center Motorola U.S. Qinghua-Toyota Research CenterToyota Japan Qinghua-Daikin Research CenterDaikin Japan Qinghua-AREVA Controlling Research CenterAREVA France Qinghua- Mitsubishi Joint R&D centerMitsubishi Japan Qinghua- Renesas Integrate Circuit Designing research institute Renesas Technology Japan Qinghua-Intel Joint R&D CenterIntel U.S. Delphi-Qinghua Auto System Research CenterDelphi U.S. Qinghua-Tianshi Software R&D CenterHongkong Tianshi Hongkong, China Table : Some Joint R&D organizations of Qinghua University with TNCs

20 Local factors affecting innovation by TNCs Other factors IPR Since 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.

21 Local factors affecting innovation by TNCs Other factors Education and S&T human resources China 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

22 Local factors affecting innovation by TNCs Other factors Education and S&T human resources Table : scientists and engineers in R&D personnel

23 The spillover of TNCs The role of TNCs remain controversial in China. The empirical evidence on whether FDI facilitates technology spillovers is ambiguous in China. Productive technology spillovers There 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.

24 The spillover of TNCs Table : scientists and engineers in R&D personnel 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.

25 The spillover of TNCs Table : scientists and engineers in R&D personnel 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).

26 The spillover of TNCs Linkages between TNCs and local firms Technical cooperation The 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.

27 The spillover of TNCs Linkages between TNCs and local firms Case Ⅰ : Knowledge transfer between local suppliers and TNCs CityWuxi City the 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 electronics Attracted 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)

28 The spillover of TNCs Linkages between TNCs and local firms Case Ⅰ : Knowledge transfer between local suppliers and TNCs Findings: 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.

29 The spillover of TNCs Linkages between TNCs and local firms Case Ⅰ : Knowledge transfer between local suppliers and TNCs Findings: StageKnowledge typeKnowledgeLinkages initiating stage Basic codified information Product blueprints and manuals Dominated by the TNC developing stage Managerial knowledge Business culture Quality control, product cost controls, materials management, etc Dominated by the TNC intensifying stage Tacit knowledgeJoint problem solving, Cooperation Interactive knowledge transfer knowledge transfer between TNCs and local suppliers

30 The spillover of TNCs Linkages between TNCs and local firms Case Ⅰ : Knowledge transfer between local suppliers and TNCs Findings: 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.

31 The spillover of TNCs Linkages between TNCs and local firms Case Ⅱ : Linkages in the industry culster Suzhou industry cluster: A quite typical industry cluster in China’s manufacturing landscape The driving power of the cluster is large-sized TNCs Export orientation, very open. Suzhou new development park Suzhou industrial garden Establishing time GNP (up to 2002)20.4 billion RMB25.2 billion RMB Inward FDI (up to 2002)7.1 billion US dollars5.43 billion US dollars Representative industriesComputer assemblySemiconductor IC industry

32 The spillover of TNCs Linkages between TNCs and local firms Case Ⅱ : Linkages in the industry culster Findings: 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 level Innovative activities of MNCs: recipient and user of technologies according parent company Domestic firms: Manufacturing capability has been developed, innovation capacity is still limited

33 The spillover of TNCs Linkages between TNCs and local firms Case Ⅱ : Linkages in the industry culster Findings: 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 garden IndustryIT manufacturingSemiconductor Value Chain Electronic components, computer equipment, digital products IC design, production, packaging and testing Key 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)

34 The 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 2006 Motivation: make use of a growing pool of skilled engineers and technicians to cut their research expenditure government pressure

35 The spillover of TNCs R&D activites in China ICT industryBiopharmaceutical industry Automobile Industry IBMAstraZenencaShanghai GM SunNovo NordiskShanghai Volkswagen NokiaEli LilyNissan EricssonRocheDaimler Chrysler MicrosoftDSMHonda FujiLonzaToyota MotorolaGEHyundai HPSiemens Some R&D centers invested in China by TNCs

36 The spillover of TNCs The negative role of FDI Industry Control & market monopoly Foreign 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

37 The spillover of TNCs The negative role of FDI Industrial Control & market monopoly Through 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……

38 The spillover of TNCs The negative role of FDI Crowding-out effect Industrial structure similarity coefficient of FDI: in 1985, in 1995 More fierce competition If TNCs introduce more new technology and products to China, rather than invest in exsisting manufacturing industries, crowding-out effect will decrease.

39 The spillover of TNCs The negative role of FDI Technical control Utilizing advanced technology to control high-end market Build production base through joint venture, call off R&D centers of Chinese partners Local firms are more dependent on TNCs technology Brain drain of R&D talents

40 Out-forward FDI and domestic TNCs General trend China’s outflows increased to $52.15 billion (include offshore financial investment) in 2008, and its outward FDI stock reached $170 billion. Source: Ministry of Commerce of China,

41 Out-forward FDI and domestic TNCs General trend Industry distribution: Wholesale & retail, Trade related services, Transport and storage, Mining, Manufacturing Destination: main to developing economies in Asia and Latin America, but the investment in developed countries has increased. RankCountry/ areaValueShare to allRankCountry/ areaValueShare to all 1Hongkong %9Korea12.11% 2Cayman Islands %10Pakistan10.71% 3British Virgin lslands66.36%11England9.51% 4U.S.18.82%12Macao9.11% 5Australia14.41%13Germany8.51% 6Singapore14.41%14South Africa71% 7Russia14.21%15Indonesia6.81% 8Canada12.51%Subtotal % Total % Top 15 destination of Chineses outward FDI, by stock, up to 2007 (100 millions of dollars)

42 Out-forward FDI and domestic TNCs Local TNCs China 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.

43 Out-forward FDI and domestic TNCs Local TNCs YearLocal TNCsInvested projectHost economyEntry modeFDI value 1986CITICWood and wood products U.S.JV40 millions of RMB 1986CITICPaper and paper products CanadaM &As, 50% share 60 millions of Canada dollars 1987CMIECMiningAustraliaJV 1999HaierHousehold electronic appliances U.S.Wholly owned 2001HualiMobile communicationU.S.M &As$1 million 2003CNOOCNatural gasGreat BritainM &As$0.615 billion 2003TCLTV, DVDFranceM &As0.3 billion Euro dollars 2004LenovoPersonal computerU.S.M &As$ 12.5 billion Typical outward FDI cases deals by Chinese TNCs to developed economies

44 Conclusions and implications Conclusions 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 latecomers Most technical standard are holded by TNCs Only 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.

45 Conclusions and implications Conclusions BUT: Technology spillover is unsatisfactory Cooperation between TNCs and other parts of NIS is limited Technical linkages between TNCs and local suppliers are limited Productive capability has been significantly improved, but not the innovative capability Negative effect of TNCs Lacking 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.

46 Conclusions and implications Conclusions 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?

47 Conclusions and implications Implications Improving impartial competition environment for domestic and foreign firms Focusing on the investment in strategic industries, guiding the flow direction of FDI Facilitating technology transfer through linkages, promoting transnational technical cooperation Building local firms’ absorptive capacities, make enterprises to be the main body of NIS, not the publich research system. Learning to compete in international rules

48 Thank you


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