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Despite the rapid growth in foreign R&D centres in China, many investments are modest according to Professor Seamus Grimes, of the Department of Geography/Centre for Innovation & Structural Change, National University of Ireland, Galway, who was based at East China Normal University, Shanghai, earlier this year.
Prof Grimes says that while there has been some outsourcing of tasks from the headquarters of multinationals to Shanghai, and some contributions to global operations from Shanghai, the primary focus is on the local market and the Asia-Pacific region.
He says only an estimated 15% of the value of Chinese electronics and IT exports is added locally while 50% to 70% of the cost of manufacturing a Chinese PC represents license fees to Microsoft and Intel.
The Chinese market has shifted from the earlier competition (and monopoly) between MNCs with high margins and major contracts to a new competition for the rapidly expanding middle market of lower priced products and lower margins.
Prof Grimes says that despite the development of a market economy, the role of the state in China is quite different to the West. There is a top-down policy and a strong focus on R&D as a driver of innovation with a neglect of the importance of markets and sophisticated customers, which has resulted in a gap between domestic and foreign firms.
Prof Grimes commented earlier this year that one bright young consultant for a multinational, who spent two years in an Irish university and had also been educated in Australia, spent a few years working for a small Irish software company in Beijing. He feels that these small companies cannot make it in the Chinese market, which is very tough, very competitive and has a huge number of Chinese companies, both large and small in the marketplace. Language and culture are serious barriers and few outsiders know how to do business effectively in China. Hence most multinationals have localized their management.
Chinese professionals who have been educated abroad and have returned to work there play a hugely significant role in intermediating between Western and Oriental ways of doing business. It’s not only just about culture, which is a major issue, but also about the political economy.
Presentation by Prof Seamus Grimes to the Royal Geographical Society/Institute of British Geographers' Annual Conference 26-28 August, 2009, Manchester, UK. (PowerPoint)