China’s Role in the Global R&D Strategies of Multinational Corporations Jason Dedrick School of Information Studies Syracuse University Based on research with Kenneth L. Kraemer and Jian Tang. Supported by grants from the U.S. National Science Foundation (SES ) and the Alfred P. Sloan Foundation. 1

Research 2 Questions – How is China trying to upgrade its position in global value chains for innovative products? – How are the R&D strategies of MNCs influenced by China’s policies? Methods – Study of China’s indigenous innovation policies – Case studies of 5 U.S. high-tech firms in China School of Information Studies, Syracuse University Personal Computing Industry Center, UC Irvine and Syracuse University

Global Value Chains: The iPhone Case 3 School of Information Studies, Syracuse University Personal Computing Industry Center, UC Irvine and Syracuse University Japan Display Korea Consumer USA CHINA Memory Retail Assembly USA Processor USA Apple Others Battery  “Designed in California, assembled in China”  Who captures the value from Apple’s success?  Where is the innovation?

iPhone value capture 4 School of Information Studies, Syracuse University Personal Computing Industry Center, UC Irvine and Syracuse University Source: Kraemer, Linden and Dedrick, 2011

China’s response: indigenous innovation policies 5  Support domestic technology companies  Promote domestic innovation and standards  Encourage MNCs to conduct R&D and transfer technology  Policy tools  Tax incentives  Government procurement policies  Local patenting requirements School of Information Studies, Syracuse University Personal Computing Industry Center, UC Irvine and Syracuse University

R&D Strategies for MNCs in China 6  Motivations  Develop technologies for large, fast-growing market  Low-cost science and engineering talent  Market access  “Most companies are doing only as much as the government forces them to. Market access requires doing R&D in China.”  Drawbacks  Risk of intellectual property loss  Lack of experienced managers School of Information Studies, Syracuse University Personal Computing Industry Center, UC Irvine and Syracuse University

Impacts of innovation policy on MNC strategies 7  Incentives for “domestic” firms and technologies  “The central government offers subsidies to domestic companies for indigenous development of technology. But there is no clear definition of what is a domestic company.”  Qualifying requires domestic R&D and patenting  “The business issue is this: does the benefit of licensing in China, like tax benefits, potential sales, goodwill with the government, outweigh the IP risk?” School of Information Studies, Syracuse University Personal Computing Industry Center, UC Irvine and Syracuse University

Operating in China’s policy environment 8  Levels of government  Central government makes rules but local governments certify firms and offer incentives.  “The local governments are under pressure to stimulate high-tech industry, so they attract companies that appear to be doing high-tech on the surface although they might not be in reality.”  MNCs can sometimes navigate to get better treatment, but bureaucracy is tricky. School of Information Studies, Syracuse University Personal Computing Industry Center, UC Irvine and Syracuse University

MNC R&D strategies vary significantly 9 School of Information Studies, Syracuse University Personal Computing Industry Center, UC Irvine and Syracuse University MNC 1MNC 2MNC 3MNC 4MNC 5 IP policies IP managed globally IP managed globally, IP from joint projects is shared IP managed globally IP managed globally, IP from joint research is shared IP registered in China and globally if developed in China Response to indigenous innovation policy Try to influence and shape policy behind the scenes Does not seek treatment as domestic company Developing local outsource suppliers, attract R&D to China Built a fabrication plant, increased R&D activity Certified as high tech company for lower tax rate R&D activities in China Development and testing for global teams, localization Localization. Potential to develop tech’s for global market Research and develop technologies for global business units Develop extensions of existing techs for local market, possible use in other markets. Development for local market, development and test for global projects Management control Limited control, decisions made in U.S. or elsewhere Limited control, decisions made in U.S. Independent projects, integrated into global projects Matrix organization, report to local management and corporate teams Lead some global projects, compete with other global labs

Summary of MNC strategies 10  Activities  Range from localization to significant innovation  Governance  Ranges from semi-autonomous to completely under control of headquarters  Evolving to greater autonomy  Interaction with government  Some seek incentives and submit to government requirements  Most compromise on patenting, only licensing jointly developed technologies  Some are more vocal, others use quiet diplomacy School of Information Studies, Syracuse University Personal Computing Industry Center, UC Irvine and Syracuse University

Conclusions 11  Strategy: MNCs pursue different strategies depending on their situation and goals  Importance of China market  Risk tolerance  Policy: concerted pressure can have influence.  China eased some indigenous innovation requirements under U.S. pressure.  Important to build coalitions.  China’s perspective: limited progress so far  A few Chinese companies succeeding  Still dependent on foreign technologies School of Information Studies, Syracuse University Personal Computing Industry Center, UC Irvine and Syracuse University

Apple’s approach 12  Alternative ways to gain access  Apple does no R&D in China  Does not seek incentives as high-tech firm  Indirectly employs 700,000 workers in China  Results  China is second largest market for Apple  No deal with China Mobile, world’s largest carrier  Lawsuits over iPad trademark School of Information Studies, Syracuse University Personal Computing Industry Center, UC Irvine and Syracuse University

Papers and contacts Journal articles R&D by MNCs in China: Dedrick, Kraemer and Tang (forthcoming) in IEEE Computer. iPhone profits, Kraemer, Linden and Dedrick (2012) in Communications of the ACM. Author contact: Jason Dedrick, Syracuse University, 13

Case studies of MNC R&D 14 School of Information Studies, Syracuse University Personal Computing Industry Center, UC Irvine and Syracuse University FirmMNC 1MNC 2MNC 3MNC 4MNC 5 Industry sector Computers software & services ComputersSoftware Semicon- ductors Mobile commun- ications Total employees in China 20,000>10,0004,0007,00010,000 R&D employees in China 6,000 total 300 Ph.D.’s < 100 researchers plus interns and post- docs 2,000 total, 250 in research labs More than 1,200 hardware and software engineers 1,000-2,000 Table 1. Companies in the study