A partnership with academia

Building knowledge for trade and development

Vi Digital Library - Text Preview

International R&D Strategies in Companies from Developing Countries – the Case of China

Case study by Maximilian von Zedtwitz, Research Center for Global R&D Management, Tsinghua University, 2005

Download original document (English)

What: Traditionally, international R&D is a phenomenon of firms originating from advanced countries such as North America, Europe, and Japan. Based on the analysis of 1269 R&D locations, a new research framework is proposed that accounts for the increasing share of R&D toward or from developing countries. Investigating technology-intensive Chinese firms, motivations, strategies, and barriers to R&D internationalization are analyzed. The paper proposes two concepts of international R&D:\\n “innovation capability enhancing” and “innovation capability exploiting”, respectively, denoting superimposed networks that allow the absorption and implementation of new technologies. Who: Can be used by a lecturer on a course on R&D outsourcing to developing countries. How: For a course on R&D and the role of TNCs.

Int’l R&D by Chinese Firms – Zedtwitz / UNCTAD Jan 2005 1


International R&D Strategies in Companies from Developing
Countries – the Case of China




Maximilian von Zedtwitz
Research Center for Global R&D Management, Tsinghua University, Beijing PR China


max@post.harvard.edu


Abstract
Traditionally, international R&D is a phenomenon of firms originating from advanced countries such as
North America, Europe, and Japan. Based on the analysis of 1269 R&D locations, a new research
framework is proposed that accounts for the increasing share of R&D toward or from developing countries.
Investigating technology-intensive Chinese firms, motivations, strategies, and barriers to R&D
internationalization are analyzed. The paper proposes two concepts of international R&D: “innovation
capability enhancing” and “innovation capability exploiting”, respectively, denoting superimposed
networks that allow the absorption and implementation of new technologies.




1. Introduction


International R&D is a by-product of intensified merger and acquisition activity (Gerpott, 1995) and more
deliberate internationalization of corporate innovation (e.g., Bartlett and Ghoshal, 1989). Research on the
latter has informed us about different typologies of corporate technology activities (e.g., Medcof, 1997),
R&D internationalization strategies (see, e.g., a special issue in Research Policy in 1999), R&D location
decision-making (e.g., Voelker and Stead, 1999), multi-site R&D project management and technology
transfer (e.g., Chiesa, 2000), and intra-organizational technical communication (Katz and Allen, 1984). Most
of this research — with few exceptions — focused on R&D conducted in advanced developed countries (as
the term is used by UNCTAD and other international organizations, henceforth ‘advanced’ countries), partly
because these countries were responsible for the bulk of global R&D conducted, partly because their
protagonists were more easily accessible and forthcoming, and partly because R&D in non-developed
countries (henceforth, ‘developing’ countries) was insignificant in scale. For instance, a review by von
Zedtwitz and Gassmann (2002) indicates that, on average, European firms conduct around 30% of their
R&D abroad (half of which in other European countries), American firms about 8-12% overseas, and
Japanese firms no more than 5% outside their home country. Data, and research, on R&D in developing
countries is scattered and few. Only a handful of countries outside the advanced economies receive some
research attention, among them are Singapore, South Korea, India, and, most recently, P.R. China.


The principal research purpose is to illuminate R&D internationalization by firms in developing countries,
with a focus on China. First, we asses the extent of international R&D emerging from developing countries,
proposing a 2x2 model of past research on international R&D. Based on research conducted on Chinese
technology-intensive companies, strategies and struggles of R&D internationalization are investigated and
analyzed. Due to their transitionary position between underdeveloped and advanced countries, the data
seems to suggest that firms from a developing country organize their international R&D activities as both
capability-enhancing or capability-exploiting structures. The paper concludes with open research areas and
some preliminary implications for research, management, and policy making.




2. Research Framework and Directions


R&D has always been considered a domain of firms in technologically advanced and economically
developed countries. Indeed, the ten largest countries in terms of GDP also lead in terms of technology-
intensity (except for P.R. China and Brazil). Transnational companies account for substantial shares (between
33% to 57%, according to a mid-1990s study reported in Gassmann and von Zedtwitz, 1999) of their total
national R&D expenditures. Multinationals dominate private international R&D investments; of the 100
largest MNCs in the world (in the year 2000), 94 were headquartered in advanced countries, 3 in China, and




Int’l R&D by Chinese Firms – Zedtwitz / UNCTAD Jan 2005 2


one each in Mexico, Venezuela, and South Korea. Patent applications in the most important markets are led
in numbers by large multinationals from the US, Japan, and Western Europe. Clearly, there is a dominance of
domestic and international R&D by firms in advanced countries (Dunning, 1988; UNCTAD, 1999, 2001).


R&D in developing countries has figured less prominently. Most research has concentrated on technology
transfer to these countries, and their capacity to absorb advanced technologies from abroad (e.g., Kim, 1980,
1997; Lall, 1990). Without a doubt, the level of science, technology, and innovation has been increasing over
the last years, but the investment ratios of S&T to GDP are still far behind advanced countries (see Schaaper,
2004; OECD, 2002). Moreover, the leading multinationals from developing countries tend to be low on
technology-intensity, and harvest natural resources such as real estate, oil & exploration, and mining &
materials. R&D by the few technology firms in these countries tends to be comparatively weak: Lack of
S&T resources and lack of local market demand for sophisticated and expensive technology goods
discourage private efforts in serious R&D.


For the first time since the mid-1980s, when international R&D became a more widespread practice among
technology multinationals, we are witnessing the emergence of a new class of high-tech companies from
developing countries, most notably India and China. These companies compete in highly technology-
intensive industries, in which customers demand great rates of innovation, and in which timely application of
technical know-how is paramount. They have one thing in common: they are headquartered in large
developing economies. They differ from their predecessors in South Korea and Japan in that they are facing
international competition in their home markets, that technological change has accelerated since the 1970s,
and that know-how — and the workforce — has become more mobile. In other words, the environment has
become more global.


Competition among these companies can be extremely intense, which does not favor the
internationalization into foreign markets. However, there a few companies have emerged that pursue R&D of
international caliber nevertheless, such as Embraer in Brazil (the world-wide third largest supplier of mid-
range aircraft), Huawei (a leading telecommunications firm from China), and Infosys (an global IT services
provider in India). The evolution of companies from developing countries, and the development of their
innovative capacity has been the subject of recent investigations (see, e.g., Lee et al., 1988; Bell and Pavitt,
1993; Sung and Hong, 1999; Xie and Wu, 2003; Xie and White, 2004). However, the extent to which firms
from developing countries develop international innovation capacities and build global R&D networks has
not been studied in detail yet. Here too the best explanation is probably the very limited number of firms
from developing countries to undertake such international R&D, at least until recently.


Figure 1 summarizes some of the previous research trajectories in international R&D research. The first
type concerns “traditional” R&D internationalization among advanced countries, i.e. mostly within the triad
countries of North America, Western Europe, and Japan. This area of R&D internationalization has been
widely researched, and yielded a very valuable and rich literature as well as an fundamental albeit initial
understanding of transnational innovation management. Most of the international R&D flows are covered by
Type 1 research, as indicated by the preferred routes of foreign direct investment (the Triad countries
accounted for 71% of all FDI inflows and 82% of all FDI outflows in 2001). However, the rise of China (and
to some extend India) as a principal recipient and source of FDI in 2002 and 2003 has led to a new,
“modern” category of research, denoted Type 2 in Figure 1. Examples of Type 2 R&D internationalization is
IBM’s establishment of R&D in India, Microsoft’s Research lab in China, and Fujitsu’s Development Center
in Malaysia. This modern form of R&D internationalization became popular in the late 1990s, driven in part
by improved economic conditions in South-East Asia, China, and Eastern Europe, in part by strategic
considerations of parent companies to set global standards and build global brands, and in part by a growing
understanding and financial commitment of MNCs to support local sales with local R&D efforts.




Int’l R&D by Chinese Firms – Zedtwitz / UNCTAD Jan 2005 3


Type 3 and 4 in Figure 1 denote a novel, so far mostly ignored direction of R&D internationalization.
Arguably, researchers such as Lall (1987, 1990) and Kim (1980, 1997) have studied the acquisition and
development of technological competencies in developing countries, but the notion of firms headquartered in
developing countries establishing R&D capabilities outside their home countries is new. The espoused view
was that firms in developing countries were too busy absorbing technology transferred from abroad, and
hardly capable to push technological boundaries themselves. They would use their new competitive
advantages to defend and build domestic market shares, and if they were sufficiently attractive enough, they
would be acquired by much larger foreign multinationals. Some countries imposed policies protecting
domestic technology companies, either by making foreign acquisitions more difficult or by curbing
competition from MNC subsidiaries. In any case, the internationalization of business and technology has
largely been unidirectional from advanced to developing countries.


Type 3 hence describes firms from a developing country conducting R&D in an advanced country.
Because of their principal motivation of “catching up with advanced countries,” this type of R&D
internationalization is labeled “catch-up,” with representatives such as Samsung of Korea investing in R&D
in Europe, and Acer of Taiwan in the US. These firms are naturally attracted to using advanced countries as
R&D bases, partly in order to acquire local technology and science, partly in order to support local product




Home
Country


Host
Country


Type 4


EXPANSIONARY


(e.g., China Æ Brazil, India Æ China)


Type 2


MODERN


(e.g., US Æ China, EU Æ India)


Type 3


CATCH-UP


(e.g., China Æ US, India Æ EU)


Type 1


TRADITIONAL


(e.g., US Æ EU, JP Æ US)


Developing Advanced


Developing


Advanced






Figure 1. Four phases or types of research on R&D internationalization.




Home
Country


Host
Country


Type 4: Expansionary


22 (3%)


Type 2: Modern


194 (25%)


Type 3: Catch-Up


64 (8%)


Type 1: Traditional


496 (64%)


Developing Advanced


Developing


Advanced






Figure 2. Absolute and relative number of 776 international R&D units and their classification to Types 1 – 4.
Classification of countries into ‘advanced’ and ‘developing’ followed definitions used by international organizations
such as UNCTAD an others.




Int’l R&D by Chinese Firms – Zedtwitz / UNCTAD Jan 2005 4


development.
Type 4 R&D internationalization is when a firm in one developing country invests in R&D in another


developing country. The reasons for this kind of investment may be in supporting second generation
technology transfer (when the earlier recipient of a technology transfers a technology on to a even less
developed country), or to support other, local business activities. An example is Acer’s R&D lab in China,
and Huawei’s R&D center in Bangalore, India.


As can be seen in Figure 2, the instances of Type 3 and 4 internationalization are not trivial. Using a
database comprising of the locations of 1269 R&D units, 776 locations were identified as ‘international’,
meaning that the parent company was headquartered in another country. 64 belonged to Type 3 or the Catch-
up Type, while a respectable 22 belonged into Type 4 or the Expansionary Type (496 R&D units belonged to
Type 1 or the Traditional Type, and 194 to Type 2 or the Modern Type of R&D internationalization.) At least
in this database, international R&D from developing countries already constitute about 11% of all
international R&D.


These Types 3 and 4 of R&D internationalization are not well understood and—to some extent—even
contradict established views on international R&D. For instance, firms from advanced countries invest in
R&D in developing countries in order to exploit labor and operating costs advantages; hence under what
circumstances would a company from a developing firm consider giving up this particular advantage by
going into a country with a highly adverse purchasing power parity? Or, as long as companies from
developing countries are still struggling with the incorporation of mature technologies transferred by joint
venture partners, how can they assume that they are ready to absorb far more sophisticated technology
currently under development in advanced countries? Furthermore, these foreign advanced technologies are
probably without differentiation potential for firms from developing countries in the more important
domestic markets.


With its high GDP growth rate and rapid industrialization of the coastal areas, as well as a growing number
of technology-based companies, China provides a very fitting example of a developing country. China also
faces many of the same problems other developing countries need to confront, such as a high degree of state
control, low purchasing power of its domestic currency, comparatively low rates of tertiary education, and a
lag in developing an economic and legal framework conducive for private business. More specifically, the
research presented in this paper pursued the following research questions:


• How significant a role play companies from developing countries, in particular China, in worldwide
R&D? How relevant is this topic for future research?


• What motivates companies from China to conduct R&D elsewhere? What are push, what are pull
factors?


• What strategies do Chinese firms employ in order to expand R&D internationally?
• What barriers and challenges do Chinese companies face in doing so that may be more specific to


them as being from a developing county?


3. Research Methodology


The aim of this research was to investigate a well researched phenomenon (internationalization of R&D) in a
new environment (China). With this objective, an empirical, quantitative research approach would have been
appropriate. However, initial exploratory interviews indicated a low intensity of international R&D in
Chinese companies as well as a high disinclination to cooperate in academic research on R&D management.
In one of the closest comparables to the present research, Jin Chen of Zhejiang University attempted to study
international innovation by Chinese companies but received only 28 valid questionnaires out of 279 sent out
(Chen, 2003). With response rates this low, and the main focus of the research questions to be qualitative in
nature, it was concluded that survey-based research would be ineffective in gathering the information
necessary for purely quantitative empirical analysis. Instead, it seemed more fruitful to focus on the top
Chinese companies and conduct in-depth research.


Data for this research was thus collected mostly by personal research interviews, and complemented by
database research. Research interviews focused on senior R&D managers in selected Chinese companies,




Int’l R&D by Chinese Firms – Zedtwitz / UNCTAD Jan 2005 5


most of which are leading firms in their industry (Lenovo, Huawei, Haier, Kelon, Founder, ZTE, Longshine,
China National Petroleum, Datang, Dongfeng, NetEase). Only the first six of these companies operate
international R&D units, while the last five did not posses foreign R&D presence as of the end of 2004. Both
groups, however, were investigated as the research objective also included to identify barriers and challenges
of R&D internationalization. Most of the interviews were conducted in late 2003 and 2004. Database and
internet research was conducted by researchers familiar with the Chinese language, thus including the much
richer documentation available in Chinese. Research reports were sent back to the interview partners and
feedback was requested to correct erroneous interpretations, to ensure greater validity of the data. In each
case multiple sources of information were used to increase reliability of observations. Although only
representing a small selection of Chinese companies, the collected R&D data was compared to an
international database of R&D locations and investment hosted by the Research Center for Global R&D
Management at Tsinghua University in Beijing.




4. What is the significance of Chinese R&D internationalization?


Most of Chinese companies are relatively young (and therefore comparatively small) and focused on
domestic markets. A World Bank survey of 1500 high-tech companies in China found that they averaged
only about 600 employees and were between 10-15 years old. Even well-known Chinese companies tend to
be small: Lenovo, China’s largest PC manufacturer, has a turnover of only 4% of IBM’s (at least before its
acquisition of IBM’s PC business in late 2004), and Haier, China’s most famous brand (according to a 2003
survey) had sales of US$9.7bn in 2003. Furthermore, 50% of the Chinese firms’ supply network is located
within their cities, and 75% within China, as Ed Steinfeld (2002) notes in his analysis of the World Bank
2001 report. Much of the R&D spent seems to be directed towards technological learning (e.g., Kim, 1997),
but little of it results in truly innovative products. Rather than building dominance in a particular industry
through technological progress, Chinese companies tend to diversify into other sectors in order to exploit
scale economies. As Steinfeld (2002) notes, Chinese “firms focus on activities with low barriers to entry.
Once the cost pressures become too intense, rather than moving upward into higher end activities or taking
the time to develop proprietary skills, the firms diversify into other low entry barrier markets. The products
themselves … are standardized.” As a result, most of Chinese R&D is opportunistic and hardly standard-
setting.


Given these rather sobering interpretations of the quality of Chinese R&D, what is the scale of
international R&D by Chinese companies? Unfortunately, no representative data exists for China, but a
comparable can perhaps be computed using data from other developing countries. Earlier research indicated




40






Figure 3. International dispersion of leading Chinese R&D-intensive companies (N=77).




Int’l R&D by Chinese Firms – Zedtwitz / UNCTAD Jan 2005 6


that at least in advanced countries, up to 70% of international R&D was conducted by the top-150 global
companies. In an attempt to approximate the volume of international R&D conducted, the author took the
fifty largest MNCs from developing countries, eliminated non-technology companies (33 remained),
summed up their weighted foreign sales (as reported in WIR, 2001), and assumed an average of 2% R&D
intensity per firm. Given an average lag of approximately 50% of R&D internationalization behind foreign
sales (estimated on the basis of von Zedtwitz and Gassmann, 2002), this results in a total overseas
investment in R&D of about US$500mn annually for the leading firms from developing countries. This is
equivalent to the R&D budget of a single reasonably-sized technology-intensive MNC and hence hardly
impressive given the scope of this research.


The Chinese firms in the studied sample operated 77 R&D units, 40 in China and a surprisingly high
number of 37 abroad (see Figure 3). However, most of these R&D units are quite small in size, with a few
exceptions such as Huawei’s software lab in Bangalore (550 engineers in 2003 and expected to grow to more
than 2000 by 2005). Haier alone operated ten small-scale research units abroad, which focused on
technology monitoring and other non-indigenous research activities. The 26 R&D units in advanced
countries were predominantly located in the US (11) and Europe (11), and mostly serving as listening post or
in product design roles. Japan with only 2 Chinese R&D units seems to be somewhat underrepresented in
this sample, probably due to the small sample size. However, even in the complete database of 776
international R&D units, Japan only accounts for 55 or approximately 7% of total foreign R&D labs.


11 of those 37 foreign R&D units (just under one third) are located in developing countries themselves,
thus falling into Type 4 labs (see Figure 4). Chinese firms thus account for about half of all international
R&D sites owned by another developing nation. Some of these R&D units are extremely small (e.g., there
are literally just a handful of people in Pakistan and Iran), but India has attracted quite substantial Chinese
R&D investment.


In conclusion of this descriptive chapter, even if only physical internationalization of Chinese R&D is
considered (ignoring, for the moment, funding of research at non-Chinese universities and participation in
international research programs), China’s R&D globalization has already reached a level comparable to some
smaller but more advanced European countries.




4. Determinants of R&D Internationalization of Chinese Companies


4.1 Motivation and Objectives
“Every multinational will set up in China. Margins are low here. If we don’t go outside, we cannot survive”
(Haier’s CEO Ruimin Zhang, quoted in The Economist, 2004). Haier, with three industrial parks in the US,
Jordan, and Pakistan, ten listening posts in Seoul, Sydney, Tokyo, Montreal, Los Angeles, the Silicon Valley,




Home
Country


Host
Country


Type 4: Expansionary


51 / 11
All / Intl


Type 2: Modern


0 / 0
All / Intl


Type 3: Catch-Up


26 / 26
All / Intl


Type 1: Traditional


0 / 0
All / Intl


Developing Advanced


Developing


Advanced






Figure 4. International R&D of Chinese companies toward advanced and other developing countries.




Int’l R&D by Chinese Firms – Zedtwitz / UNCTAD Jan 2005 7


Amsterdam, Vienna, Taiwan and Hong Kong, and design centers in Lyon, Los Angeles, Tokyo Amsterdam,
and four other cities, is well on its course towards R&D internationalization. The latest addition to their
R&D network is a design center in India, opened in late 2004.


What drives Chinese companies to set up R&D overseas? Given the fact that China itself is a huge and still
growing market, most market-oriented R&D is likely to be retained and developed at home. Given also that
China still receives a great amount of foreign technology (see e.g. Jolly (2004) for the results of a survey of
the motivations of Sino-Chinese joint ventures), we can hypothesize that Chinese firms internationalize R&D
in order to develop alternate channels of technology sourcing from advanced countries (hence, mostly home-
base augmenting sites in Kuemmerle’s (1997) notation). Automobile manufacturer Dongfeng Motors has
established four listening posts in the US, Germany, the UK, and France for the purpose of being close to
major competitors (not markets) and their technological bases. Note that Dongfeng recently reorganized
itself to become a major 50-50 joint venture company wit Nissan Motors of Japan. The new Dongfeng-
Nissan R&D center in Guangzhou has an investment of US$40mn and serves as a platform to combine
Japanese automotive technology with Chinese standards and product requirements.


Efficiency-driven rationales (see Gassmann and von Zedtwitz (1999) for an overview) such as the
exploitation of multiple time zones, critical mass of R&D, and local cost advantages, hardly play a role for
Chinese companies abroad. As a matter of fact, many foreign companies come to China because of cost
advantages, hence Chinese R&D abroad tends to be more expensive than at home, and hence less likely to be
set up in the first place. However, in cases where Chinese firms operate large manufacturing sites abroad,
local R&D has been seen to emerge in support of product localization and process innovation (e.g., Haier’s
R&D site collocated with its Camden plant in South Carolina, USA).


While input-related rationales are probably the strongest reasons for Chinese R&D internationalization in
advanced countries, market and output-related determinants may explain the establishment of R&D in other
developing countries such as Iran, Jordan and Chile. Haier’s prides itself for customer sensitivity; for
instance, it developed air conditioners to cope with particular adverse desert conditions in the Middle East,
and designed washing machines such that they could also handle cleaning vegetables in rural Asia. ZTE’s
R&S sites in Chile and Pakistan are dedicated to local product adaptation, thus support local business
development. However, the emergence of R&D in other developing countries is still in its infancy.


Political, regulatory and governmental factors were not mentioned as having a strong impact on the
decision where to set up international R&D sites. However, as more and more Chinese companies develop
indigenous intellectual property, foreign companies and states are attacking Chinese companies abroad over
their earlier IPR infringements at home. As a result, Chinese companies are barred entry into foreign markets
based technologies that they use domestically. Local R&D centers could overcome these difficulties by
developing local technology which, in the process, would build new technological competencies for Chinese
firms abroad.


International R&D is often also a consequence of merger and acquisitions. Although Chinese companies
have been more of a target than a source of M&A, this seems to be changing, as show the investments of
Shanghai GM in GM Daewoo and the acquisition of Germany’s Schneider by TCL. Thus, R&D units of
acquired companies become part of the Chinese firm’s R&D network, often making international
coordination necessary.




4.2 Evolution of R&D


The past two decades produced a number of descriptions of strategies for internationalization of R&D and
innovation. Based on Perlmutter’s (1969) and Bartlett and Ghoshal (1989) model of internationalization of
organization, Gassmann and von Zedtwitz (1999) developed an evolutionary model of international R&D
organization, which fits our purpose of studying the early stages of international Chinese R&D. They
describe five types of international R&D organizations: ethnocentric centralized R&D (with a dominant
R&D center serving far-away markets), geocentric centralized R&D (where the R&D center engages in
cooperative projects with customers and other research institutes), the R&D hub (with the R&D center
serving as the central information and decision-making platform for all global R&D units), polycentric
decentralized R&D (of R&D units with little global alignment and coordination), and the integrated R&D




Int’l R&D by Chinese Firms – Zedtwitz / UNCTAD Jan 2005 8


network (in which all R&D units are equal partners and information and decision-making is freely shared).
Companies without international R&D units have either ethno- or geocentric centralized R&D


organizations. In the research sample, this is the case for Lenovo, Netease, CNPC and Longshine. Netease,
an Internet service company with almost 200 million registered accounts, actually shifted its development
center from San Francisco, CA, where it was originally founded, to Beijing and Guangzhou, as the company
relocated to China. Most of the technology is imported from the US and more advanced IT companies, but a
large engineering staff writes code and programs targeted at the Chinese market. Some of its engineers are
foreigners who prepare Netease for more global innovation challenges. Other companies have engaged in a
number of cooperative projects and alliances, for instance Lenovo with Intel and Microsoft, and CNPC with
Shell and ExxonMobile. They are becoming more ‘open’, and hence overcome ethnocentrism for the benefit
of a more geocentric outlook (see Figure 5).


Moving towards greater physical international R&D presence are companies like Datang, Founder, Kelon,
and Dongfeng. Datang had some less successful experience of joint ventures with foreign companies such as
Lucent of the US, but have now formed JVs with Philips, Samsung, and UTStarcom. It seems on track with
R&D internationalization as it explores greater use of its Iranian R&D site. Its CEO has a PhD from a
Belgian university and work experience in a Siemens R&D lab. Founder recently set up an R&D lab in
Scotland, which it plans to expand into its new European headquarters. Dongfeng’s alliance with Nissan has
obvious consequences of internationalization of product development between China and Japan at the least.


Some companies have firmly established global R&D networks, such as ZTE, Huawei, 3NOD, and Haier.
ZTE established its first three foreign R&D centers in the US and Chile in 1998, and founded more R&D
labs in Korea and Sweden since. Huawei also has solid international R&D experience. It was the first
Chinese company to set up an R&D center in Bangalore in 2000, earmarking over US$100mn for the Indian
R&D site, which it expects to serve the Indian subcontinent, the Middle East, and Africa as strategic markets.
At 550 engineers in 2003, it is expected to grow to a staff of 2000 by 2005. 85% of the R&D staff are Indian
nationals, as the purpose is the tap into the rich Indian expertise in software design, 3G mobile
communications, wireless infrastructure, network management, etc. Huawei also operates JVs with Siemens,
3C, Qualcomm and Microsoft to position itself favorably in the upcoming next-generation mobile
communication technology. Almost 46% of its employees are in R&D, although due to the lower labor costs
in China, the overall R&D to sales ratio of 10% is more in line with industry averages.




4.3 Barriers and Problems


What are some of the greatest barriers and problems of Chinese companies to expand R&D internationally?
In part, they are reflected in typical internationalization problems of companies from developing countries,
but some are more specific to China, and some are specific to R&D. Steinfeld (2002) found three principal




Central
R&D


Central
R&D


R&D-1


R&D-2


R&D-3


R&D-4


Central
R&D


Intl. Manuf.


Intl. Sourcing


Techn. Parks


Intl. Distr.


Lead Users


Strat. Alliances


Central
R&D


R&D-1


R&D-2


R&D-3


R&D-4


R&D-1


R&D-2


R&D-3


R&D-4


Ce
nt


ra
l R


&D
D


is
pe


rs
ed


R
&D


Competition Cooperation


HUB
MODEL


POLYCENTRIC
DECENTRALIZED


GEOCENTRIC
CENTRALIZED


ETHNOCENTRIC
CENTRALIZED


INTEGRATED
R&D NETWORK


HaierHaier


LenovoLenovoNetEaseNetEase


ZTEZTE


FounderFounder
HuaweiHua ei 3NOD3N D


DongfengDongfeng
DatangDatang


KelonKelon
LongshineLongshine CNPCCNPC






Figure 5. Evolution of Chinese companies towards greater R&D internationalization.




Int’l R&D by Chinese Firms – Zedtwitz / UNCTAD Jan 2005 9


challenges of Chinese companies to internationalize:
1. Chinese companies have a size disadvantage: due to its inferior size, they cannot compete head-to-head


with much larger multinationals
2. Chinese companies continue to emphasize local business integration despite increasing international


sales. For instance, supply chains are still highly local or regional, and there is little integration with
global technology suppliers. As a consequence, Chinese companies are often barred from more value-
added activities, and focus on low-cost competition, and hence unable to engage in product
differentiation as a source of competitive advantage.


3. The also lack sufficient product innovation required to charge higher profit margins, rather than just cost
reduction through efficiency innovation. While this produces advantages for manufacturing and
customers, it also locks in Chinese companies in mostly domestic-oriented innovation.


Additionally, the sampled companies a number of drawbacks relating to lack of resources, lack of
experience, and entry barriers in new markets:


Lack of cash and resources: Although China is an expanding market, profit margins are low and hence
only little can be reinvested in R&D. Investment in groundbreaking R&D (as opposed to technology
adaptation and product localization) is more costly, and the first movers are likely to experience a loss of
market share. Hence, less investment in indigenous R&D which is the lifeblood of global R&D networks.


Lack of management expertise: Chinese companies have little experience in running or just participating in
international companies, and hence few of them are qualified for international R&D management
assignments. Overseas returnees have been invited to take a stronger lead, but essentially one of the most
important phases of corporate internationalization would thus be carried out by outsiders.


While the domestic market is still strong, there is little incentive to leave China and conquer less attractive
markets elsewhere. Among those, developing countries require the least product adaptation but also offer
fewer profits, while advanced countries as overseas markets are already highly contested by technology-
intensive multinationals, leaving Chinese firms with some less attractive niche markets to begin with.
Without size, it is difficult to demonstrate the long-term commitment necessary to conquer foreign markets.


There is no efficiency advantage to go elsewhere for R&D as China is already offering a very favorable
price-to-performance ratio for R&D and engineering work. Any local R&D work must be paid for with local
revenues, which are generated as local start-up businesses and hence are often reinvested in business
development rather than long-term product development.


While younger university graduates speak English better, senior and middle R&D staff has no or little
command of English, which is the international language of business and technology. It will take several
years before more linguistically trained engineers will have entered the ranks and file to support R&D
internationalization (incidentally, many of Haier’s middle managers are quite young, i.e. in the late 20s).


Chinese management also emphasizes personal networks (‘guanxi’) to take decisions and get things done.
In international settings, where people are far away from centers of decision making and corporate networks,
foreign R&D managers are disadvantaged to support their causes and risk permanent loss of social power if
removed for too long. Recent initiatives, such as Dongfeng’s ‘web-enable R&D systems’ are expected to
alleviate this problem.




4.4 Strategies of R&D Internationalization


Overall, it seems that truly global R&D in Chinese companies is still a long way away. Current international
R&D structures function because of strong personal leadership or because of a military-style command
structure. There is little evidence to suggest that foreign R&D networks managed in this manner are
sustainable over the long run, but perhaps we are about to witness the creating of a unique Chinese approach
to R&D internationalization. Based on the China example, we can make the following propositions:


• Firms from developing countries are more likely to internationalize R&D into advanced countries
because of their shortage of domestic technologies, and because of various limitations to serve foreign
markets technologically.


• Firms of developing countries will internationalize R&D into other developing countries




Int’l R&D by Chinese Firms – Zedtwitz / UNCTAD Jan 2005 10


opportunistically, i.e. when following local customer requests. As a consequence, they may reap long-
term first-mover advantages in less privileged regions of the world.


• Thus, companies with more developed R&D networks create two superimposed R&D networks: one
which is innovation capability enhancing, i.e. developing the R&D network’s capabilities to understand
and conduct cutting-edge technology development by absorbing know-how from advanced countries,
and one which is innovation capability exploiting, i.e. passing on technologies and technical know-how
which has been absorbed earlier and refined for use in other developing countries.


The innovation capability enhancing/exploiting concept is related to Kuemmerle’s (1997) home-base
augmenting/exploiting notation, but differs in two important aspects:
1. The unit of analysis is the R&D network and its various coordination mechanisms and interactions,


rather than a dyadic knowledge transfer relationship between the overseas R&D unit with its home-base.
2. The focus is on innovation capability and its context-specific actualization, rather than knowledge and


information exchanged between R&D units.


5. Future Research


The paper presents research that suffers from several weaknesses, which ongoing research is trying to
overcome:


1. The data set is quite limited and biased towards a) Chinese companies and b) IT companies. The
population size limitation must be solved by systematically screening all Chinese firms of a consistent
criterion (e.g., total sales or total R&D investment). The focus on Chinese companies offered greater in-
depth analysis, but limits the potential to generalize the findings. Similar research needs to be conducted in
other countries of similar economic development. The bias towards IT companies is representative of the
greater international R&D involvement of Chinese IT companies.


2. The use of R&D units is not a perfect proxy for real R&D internationalization, as a) the average size of
R&D units in China may be different from the average size of R&D units elsewhere, and b) the denotation of
R&D in China may differ from international usage. Data on R&D investments and staff deployment are,
however, difficult to obtain systematically.


3. With respect to the 2x2 matrix of the four types of international R&D research, the selection of parent
companies for inclusion of R&D sites of their international subsidiaries must follow globally consistent and
reasonable criteria. The current data of international R&D locations has been collected using the top
companies of developing countries and benchmarking them against top companies of advanced countries.
Although the latter group is much larger than the former, it must be ensured that companies are considered
for the same reason and up (or rather) down to a certain level of e.g. annual turnover or R&D investment.
Research is ongoing to compensate for this shortcoming.


This paper is thus still preliminary in its analysis, and the suggested findings must be considered in the
light of these weaknesses.




6. Conclusions


In this paper, the argument was made that internationalization of R&D from developing countries is on the
rise. Four types – and phases – of international R&D research were discerned. As an example of type 3 &
type 4 R&D internationalization, Chinese companies illustrated some of the motivations, strategies, and
difficulties that such companies face. More research is required in terms of deepening the research in
Chinese technology-intensive firms as well as companies from other developing countries such as South
Korea and India, to develop better models and more knowledge about this relatively recent phenomenon.
While this research is still incomplete and the conceptual development ongoing, this paper attempted to offer
a new framework to analyze international R&D management research as well as a new perspective on
specific management models of R&D in developing countries.




Int’l R&D by Chinese Firms – Zedtwitz / UNCTAD Jan 2005 11




Bibliography


Bartlett, C.A.; Ghoshal, S. (1989): Managing Across
Borders: The Transnational Solution, Boston.


Bell, M. and Pavitt, K.(1993). Technological
accumulation and industrial growth: contrasts
between developed and developing countries.
Industrial and Corporate Change, 2, 2, 157-210.


Chen, J., (2003). Global Innovation. Economic Science
Press, Beijing.


Chiesa, V. (2000): Global R&D Project Management
and Organization: A Taxonomy. The Journal Prod.
Innov. Management, vol. 17, pp. 341-359.


Dunning, J. H. (1988). Multinationals, Technology and
Competitiveness, London: Irwin Hyman.


Economist (2004). Haier’s Purpose. The Economist,
Story-I.D. 2524347, May 18, 2004.


Gassmann, O.; von Zedtwitz, M. (1999): New
Concepts and Trends in International R&D
Organization. Research Policy, Vol. 28, 231-250.


Gerpott, T.J. (1995): Successful integration of R&D
functions after acquisitions: An exploratory
empirical study. R&D Management 25, 161-178.


Jolly, D. (2004). Bartering technology for local
resources in exogamic Sino-foreign joint ventures.
R&D Management, 34, 4.


Katz, R.; Allen, T. (1982): Investigating the Not
Invented Here (NIH) Syndrome: A Look at the
Performance, Tenure, and Communication Patterns
of 50 R&D-Project Groups: R&D-Management 12,
1, 7-19.


Kim, L. (1980). Stages of development of industrial
technology in a developing country: a model.
Research Policy, 9, 254–277.


Kim, L. (1997). Imitation to Innovation: The Dynamics
of Korea’s Technological Learning, Boston, Mass.:
Harvard Business School Press.


Kuemmerle, W. (1997): Building Effective R&D
Capabilities Abroad. Harvard Business Review,
March-April, 61-70.


Lall, S. (1987). Learning to Industrialize: The
Acquisition of Technological Capabilities in India.
London: Macmillan.


Lall, S. (1990). Building Industrial Competitiveness in
Developing Countries. Paris: OECD.


Lee, J., Bae, Z. & Choi, D. (1988). Technology
development processes: a model for a developing
country with a global perspective. R&D
Management. 18, 3, 235-250.


Medcof, J.W. (1997): A taxonomy of internationally
dispersed technology units and its application to
management issues. R&D Management 27, 4, 301-
318.


OECD (2002). Science and Technology in China:
Trends and Policy Challenges. OECD Science,
Technology and Industry Outlook 2002, OECD,


Paris. 247-276.
Perlmutter, H.V. (1969): The Tortuous Evolution of the


Multinational Corporation. Columbia Journal of
World Business 4, 9-18.


Schaaper, M. (2004). An Emerging Knowledge-Based
Economy in China? Indicators from OECD
Databases. OECD STI Working Paper 2004/4.


Steinfeld, E. (2002). Chinese Enterprise Development
and the Challenge of Global Integration.
Background paper for World Bank Study
“Innovative East Asia: The Future of Growth.” Also
forthcoming in World Bank volume “East Asian
Networked Production,” edited by S. Yusuf.


Sung, C. S., Hong, S.K., (1999). Development process
of nuclear power industry in a developing country:
Korean experience and implications, Technovation,
Vol.19. No.5. 305-316.


UNCTAD (1999). World Investment Report 1999:
Foreign Direct Investment and the Challenge of
Development, Geneva: United Nations Publication.


UNCTAD (2001). Transfer of Technology, Geneva:
United Nations Publication.


Voelker, R.; Stead R. (1999). New Technologies and
International Location Choice for Research and
Development Units: Evidence from Europe.
Technology Analysis & Strategic Management, 11, 2,
199-209.


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.


Xie, W. and White, S. (2004): Sequential learning in a
Chinese spin-off: The case of Lenovo Group
Limited. R&D Management, 34, 4.


Xie, W. and Wu. G. (2003). Differences between
learning processes in small tigers and large dragons.
Research Policy. Vol.32: 1463-1479.




Login