Foreign funded R&D in China – Is it driving China’s S&T takeoff? Gary H. Jefferson Dept. of Economics/ International Business School Brandeis University Prepared for the Conference on New Global Realities: Winners and Losers from Offshore Outsourcing, March 3-4, 2006 Mount Holyoke College

What are the issues? Is foreign-funded R&D driving China’s technology takeoff? Is the surge of foreign-funded R&D in China undermining R&D and innovation in the U.S.?

What are the answers? Is foreign-funded R&D driving China’s technology takeoff? No. Is the surge of foreign-funded R&D in China undermining R&D and innovation in the U.S.? Probably not.

Is China experiencing an S&T takeoff?

R&D expenditure by performer and by source, 2003 foreign share: < 60.1 x = 18.6% Total performers Independent research institutes Enterprises (of which: LMEs) Institutions of higher education others 100% (46.8) Total sources Government funds Enterprise funds (foreign firms share of VA) Foreign funds Other funds 100% (27.6)

Contributions of foreign vs. Domestic-funded LME - R&D

Is China experiencing a patenting takeoff? Chinese patent applications, Source: Hu and Jefferson (2004), based on data from the website of China’s National Bureau of Statistics,

Are firms using R&D to generate invention patents? Impacts of R&D and FDI on patenting…domestic yes; foreign no. Hu and Jefferson, 2005

Findings The patenting of Chinese firms derives from R&D and FDI, where the latter expands technological opportunity for patenting… The patenting of foreign firms is largely autonomous…i.e. it is weakly associated with R&D spending and industry FDI. Much of foreign patenting is based on existing innovations (i.e. from parent companies), which do not require substantial additions of R&D…

What is driving China’s rapid technology development?: Economic openness – e.g., foreign direct investment FDI as a direct source of technology transfer  domestic innovation/imitation and foreign technology adoption. FDI as an indirect motivator for both domestic and foreign firms to intensify their R&D spending.

An index of technology development that combines the measure of R&D intensity and patent intensity

How responsible is FDI for driving China’s technology development? ln(TechDev) =  + βln(FDI) + ε We estimate this equation using the observations for the 30 provinces shown in the two figures…. R-square = A close association exists between the spatial distribution of FDI and technology development; anticipate that the relationship runs primarily from FDI to domestic technology development.

The role of technology import markets… Hu and Jefferson (2006) find robust complementarities between in-house R&D spending and purchases of imported R&D, i.e. purchases of technology imports increase the returns to in-house R&D and thus motivate R&D spending.

Conclusion Foreign-funded R&D is not driving China S&T takeoff. The principal drivers are other foreign sources, i.e. FDI and market- mediated purchases of technology imports.

Is foreign funded R&D more “R” oriented? Is it of higher quality? Do foreign firms spend more on basic research than their counterparts? Seemingly not… Dependent variable: Ln(basic R&D) Ln(cumulativeFDI/ total fixed assets) (2.91) Ln(sales)0.013 (8.87) Adj. R-square0.004

Are the foreign funded research centers engaged in basic research, which is displacing U.S. research activity? Motives for establishing R&D centers? Localization. Applied research intended to adapt established products to the local Chinese market. The localized innovations include design innovations that are intended to appeal to Chinese consumers and process innovations that are intended to enhance efficiency, often by capitalizing on the abundance of low-cost labor. Access to skilled talent. Bell Lab under Lucent Technologies is the largest MNC research institution in China. It has more than 500 scientific researchers in Shanghai and Beijing, 96 percent of whom possess PhDs or master’s degrees (Wei Cai, 2006). Strategic motives focused on establishing an MNC as a first mover or leading player in a Chinese market. This positioning may be intended to establish branding advantages in the Chinese market as well as to influence Chinese policy toward the MNC in question.

Conclusions…. Is foreign-funded R&D driving China’s technology takeoff? No…But FDI and imported technology markets are through their indirect effects on motivating R&D and patenting by domestic firms… Is the surge of foreign-funded R&D in China undermining R&D and innovation in the U.S.? Not the industrial enterprise based R&D…The R&D in foreign firms is even more applied – i.e. not using basic research funds – than that of domestic firms. The emphasis is on the localization of established technologies. So far, we have little data on foreign funded R&D centers…However, these are likely to be engaged in localization and creating a learning curve…not yet in high end R&D.

R&D intensity by ownership type…

Patent applications by ownership type

Industry distribution of foreign patent applications Source: Hu and Jefferson (2004), based on calculations using the NBS large and medium-size enterprise data.

An alternative hypothesis The issue is not international frontier innovations arising from foreign R&D. Much foreign R&D is used to adapt foreign designed products to local conditions; it often does not involve much formal R&D. The larger issue is technology transfer…a more primitive stage of technology advance. FDI motivates domestic R&D. Domestic R&D and FDI lead to imitation/innovation, new product development and patenting.