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Analysis/Comment Last Updated: Aug 23, 2010 - 8:24:15 PM


China and the new challenges for inward FDI investment - - Prof. Seamus Grimes, Shanghai
By Prof. Seamus Grimes, NUI Galway, Ireland
Apr 30, 2010 - 3:31:13 AM

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Prof. Seamus Grimes with a colleague at the East China Normal University, Shanghai. A towering statue of Mao Zedong, the founder of the People's Republic of China in 1949, is in the background. Mao said in a speech in Beijing in 1957: "Letting a hundred flowers blossom and a hundred schools of thought contend is the policy for promoting progress in the arts and sciences and a flourishing socialist culture in our land."

Seamus Grimes is a professor of geography at NUI Galway, Ireland and is also a staff member of the university's Centre for Innovation and Structural Change (CISC). His research interests are: Technology and development; Internationally-traded services and MNC (multinational company)  evolution. He is currently based at the East China Normal University, Shanghai.

I’m back in sunny Expo Shanghai for a second extended visit after a year to look at foreign R&D investment. Those who are familiar with the sector will know that the atmosphere for inward FDI (foreign direct investment) investment in China has changed a little of late, but one can never be sure about what really is going on, and that is particularly true for somebody like myself with a significant language, if not a wider cultural barrier.

There has been a lot of recent commentary in the media about the ‘new’ focus in ‘indigenous innovation’ by the Chinese government. This is more a new elaboration of the key Science and Technology 15 year plan published in 2006. Multinational companies here have had some concern that this would mean an uneven playing field, with some restrictions on their access to the market.

They are probably correct. Unlike many small states such as Ireland, China is in a very strong bargaining position with multinationals. The huge size of its market, which is growing at a faster pace than other regions of the world, has become a vital area of focus for many global corporations. Major corporations like GE, which are involved in key sectors such as energy, avionics and healthcare equipment already have huge back orders for everything from wind turbines to locomotives to airline engines.

Recently around 50 new airports were completed in China and in the next 10 years another 50 are due for construction. Trillions of dollars will be invested in all kinds of infrastructure. So there are huge public procurement contracts up for grabs. The main fly in the ointment is that China is now stipulating that these contracts must prioritise products and services with ‘indigenous innovation’, or intellectual property and trademarks that have been initially registered in China.

It is not to suggest that foreign companies are not prepared to register patents in China; the general trend, however, is to register patents, even if some contribution towards them comes from R&D centres in China, in more developed regions like the US. This is for business reasons and it is also related to a poor record of implementing what is now a reasonable IP protection regime.

But multinationals will need to rethink their business model if they are to gain access to lucrative contracts in this rapidly expanding market. The multinational model is increasingly global in its orientation, and although core R&D activity remains close to the corporation’s headquarters, there has been a growing trend in recent years to decentralize R&D functions to emerging regions like China and India, particularly to be close to existing manufacturing operations and to adapt products to local markets.

China now has had around 30 years in foreign direct investment, and while the earlier expectations were based on a transfer of technology from foreign companies to local companies, this has not really happened to any great extent. This is not to say that local companies have not benefitted from the presence of major multinationals in China, but the state has become increasingly wary about its dependence on foreign technology. China is no longer willing to play the subservient role of being the ‘world’s factory’ and is determined to move its economy up the value chain into more knowledge based activities. Many would agree that this is an important issue, and would encourage a re-thinking of policy. The danger, however, is that China might move in the direction of ‘techno-nationalism’ by seeking to develop domestic standards rather than becoming more integrated in international standards. While this might offer some level of protection to Chinese companies for a period, it is also likely to make it more difficult for them to compete globally.

China has some rather unique features which might suggest that it is developing its own form of capitalism, which some have called state or authoritarian capitalism, in that the state plays a very significant role in controlling many aspects of the economy. State Owned Enterprises, which are often overly bureaucratic organizations continue to be very important, and certain sectors such as energy and telecommunications services continue to be strongly regulated and to a large extent closed to foreign companies. To some extent the state is seeking to allow for a transition period where Chinese companies can exercise a limited form of competition within such closed sectors, before the real global competition begins in earnest. Also the dominant political objective of creating a ‘harmonious society’, influences greatly China’s economic policies.

China is also adopting its position to global integration in relation to its increasing influence in the world economy. Part of its determination to develop its own technology is related to issues such as defence, since it has a long historical memory of being invaded and mistreated by foreign powers. There is little new about the scramble for China’s market: what is new is China’s ability to control access to what is seen by many as a major source of future expansion.

Although multinational companies have expressed concerns about how China’s new rules about intellectual property development may play out, they are probably more concerned about their own ability to compete within the Chinese market for a growing share of what is available. To date such companies have had the market to themselves, and they were in a position to obtain high profit margins and a good level of reward in the form of licence fees and royalty payments for any technology transferred to China. More recently, however, they are experiencing a new form of competition from local companies. In many cases Chinese companies are not very innovative and do not invest very significantly in R&D. They are also focused very strongly on the rapidly expanding middle segment of the market with hundreds of millions of people earning an average of $5,000 a year. Multinationals are being forced to develop less expensive products for this ‘good enough’ market, and this has implications for their very significant investment in R&D. Just at the time, therefore, when China is growing in significance as a key market for the future growth of major corporations, gaining market share in China may prove to be increasingly challenging.

March 2009: Letter from Shanghai

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