Science & Technology in China Brussels Science & Technology in China - Some Issues Prof. Dr. Max von Zedtwitz max@post.harvard.edu +86 135 0106 4914 +86 10 6278 9797

China is Undergoing a Massive Economic Expansion Fastest economic expansion ever! CAGR 80-00: 9.6% CAGR 00-10 E: 7.8% Real GDP (US$ Bn) Growth Time period 2500 China’s 20 yr economic reform 7X over 20 years 2000 Japan post WWII recovery 6X over 25 years 1500 2nd Industrial Revolution 1000 3.5X over 60 years 500 1st Industrial Revolution 2.5X over 100 years 1980 1985 1990 1995 2000 2010E Source: China Statistical Yearbook; BCG analysis

S&T is on the Agenda Increasing S&T literacy Shift towards Research Intellectual Property Rights Building competitiveness … and many others!

China’s Agenda for S&T: Increasing S&T Literacy R&D amount to about 1.5% of GDP in 2004, up from 0.7% in late 1990s Annual growth rate of 15% between 1991 and 2002, far more than the average growth rate of Western economies (2-3%) Expected focus of national innovation system: Basic research University expansions National science foundation Information and telecom infrastructure Challenges OECD countries, India will react (Japan has increased R&D to GDP ratio by 1% to 3.2% within a decade, too) Only 5% of China has tertiary education: much potential (US: 37%, Europe: 24%), but also much to do to catch up

In China, Number of Graduate Students is Increasing Fast

Relative Share of Graduates from Different Faculties Philosophy Economics Sciences Engineering

China’s Agenda for S&T: Shift to Research In many areas, China is still in the stage of external technology assimilation However, foreign R&D activities are poorly integrated in the Chinese N.I.S. Focus is on technology absorption and generation of production capacity As long as markets are expanding, there is no need to invest in research and much incentive to spend on marketing, distribution, manufacturing competence Assessment Once external technology inflow subsides, necessary infrastructure of original innovation may be missing and may take a long time to build up (example: Japan) Continued investment in production know-how Withdraws talents from research Establishes a path dependency with respect to sunk costs Lenovo-IBM: Buy into a dying industry?

Foreign R&D Fairly Independent from Chinese Innovation System Cooperation with Chinese Academies and Research Institutes 2003: 154 bn RMB (15 bn Euro) R&D in China About 60% corporate, 30% gov’t R&D, 10% universities About 380 R&D central gov’t labs and 4’000 labs in provinces CAS, MOST, NSFC Good infrastructure with respect to spin-offs and S&T parks/incubators Problems: Tsinghua, Fudan, Beida, etc.: Exaggerated expectations in terms of own value (still, costs per project comparatively low) Most lack project management ability Few professors speak English Loss of IP(?) No brain drain observed in MNC – CAS collaborations MNCs get little sponsorship from NSF or MOST programs Little spill-over (training, etc.) observed (Wang 04, Yuan & Lu, 05)

Relevance: Why is China attractive for Foreign R&D? Majority of foreign R&D sites established for market reasons China a potential market of 1.3 billion customers Growing wealth of Chinese population Fairly inaccessible local science and technology National R&D intensity: about 1.5% (advanced countries: about 2+%) Increasing number of Chinese patents and Chinese papers Total of 743’000 scientists and engineers annually (second worldwide) WTO and domestic reforms (IPR, law enforcement, VC, etc.) Bright people available for good price BEA Systems, 2002: First ever int’l R&D site in China LG, 2002: Largest int’l R&D site in China Motorola, 2003: 18 R&D labs in China PRC Gov’t, 2005: 700+ R&D centers in China

Rise of Foreign R&D Labs in China ‘87 ‘88 ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 2 4 6 8 10 12 14 16 18 20 22 # of R&D labs / year STS (2003) and own research

Foreign R&D Location in China Development in Shanghai Historic reasons (also, more expats) Close to customers & production Fast-paced Central location Research in Beijing Standardization and decision-making bodies > 100 universities Cluster vs. crowding-out effects But: Decision to be made case by case: account for industry and R&D focus (e.g., Pharma, TCM  Shanghai; IT, Genetics  Beijing) 1 78 1 8 1 4 9 61 2 Anzahl Fragebogen: 30 Stück, davon vom Konsortium ausgefüllt: 8 1 1 9 5 Zedtwitz (2004): R&D in China. R&D Mgt Ch-11

China’s Agenda for S&T: IPR Management Traditional attitude to art and craftsmanship promoted copying of old masters “To Steal a Book is an Elegant Offense” Useful for diffusion of technology, but not necessarily for invention Although China has been home to a large number of important inventions, few were protected by any legal institutions (such as IPR) The current record of IPR in China shows weak incentives for invention Assessment Problem is mostly with respect to IPR enforcement, not law Foreign MNCs are considering to retreat cutting-edge technologies and investments unless IPR situation improves As some Chinese companies develop into technology companies they too will be unable to reap the benefits of their work

Domestic and Foreign Patent Applications in China Ref: Hu and Jefferson (2005)

Increasing Number of Patent Applications

China’s Agenda for S&T: Building Competitiveness The origins and mainstay of Western multinationals lie in their ability to develop unique technological capabilities (eg, Microsoft, Merck, Shell, Siemens, etc.) International success is tied to innovative capacity and the ability to stay abreast of latest technology (R&D, NPD) Assessment Western and Japanese firms have built up international innovation organizations around a core R&D center Only a handful of Chinese companies have started to do so Main limitations: Lack of international experience: no global managers, lack of English Lack of R&D experience: no R&D expertise, no R&D currency No cost advantages abroad: int’l R&D comparatively expensive Most companies still young and small: focus on short-term, not R&D

Strong R&D  Basis for International Competitiveness Why a Chinese firm would internationalize R&D: Access to local technology and market intelligence Hiring foreign experts Developing a global image Supporting local sales Example Haier: R&D in Qingdao, Beijing, Guizhou R&D in Hong Kong (SAR), London, Silicon Valley, Sydney #5 white-goods company worldwide Competes & cooperates with companies like Siemens, Whirlpool, GE  A necessary (for some) but painful process!

Chinese R&D, Globally Dispersed 40 Zedtwitz (2005): R&D from Developing Countries. UNCTAD

Questions?

Recent References von Zedtwitz, M. (2004): Managing Foreign R&D Labs in China. R&D Management, Vol. 34, No. 4, 439-452. von Zedtwitz, M. (2006): Connecting Science to Innovation: Managing R&D on a Global Scale. Edgar Elgar: Cheltenham. Gassmann, O.; von Zedtwitz, M. (2003): Trends and Determinants of Managing Virtual R&D Teams. R&D Management, Vol. 33, No. 3, 243-262. von Zedtwitz, M.; Gassmann, O. (2002): Market versus Technology Drive in R&D Internationalization: Four different patterns of managing research and development. Research Policy, 31, 4, 569-588. von Zedtwitz, M. (2003): Initial Directors of International R&D Laboratories. R&D Management, Vol. 33, No. 4, 377-393. Fischer, W.A.; von Zedtwitz, M. (2004): Chinese R&D: Naissance, Renaissance, or Mirage? R&D Management, Vol. 34, No. 4, 349-365. Boutellier, R.; Gassmann, O.; von Zedtwitz, M. (2006): Managing Global Innovation - Uncovering the Secrets of Future Competitiveness. 3rd ed. Springer: Heidelberg