Foreign funded R

1
Foreign funded RD in China Is it driving
Chinas ST 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

2
What are the issues?

• Is foreign-funded RD driving Chinas technology
  takeoff?
• Is the surge of foreign-funded RD in China
  undermining RD and innovation in the U.S.?

3
What are the answers?

• Is foreign-funded RD driving Chinas technology
  takeoff? No.
• Is the surge of foreign-funded RD in China
  undermining RD and innovation in the U.S.?
  Probably not.

4
Is China experiencing an ST takeoff?
5
RD expenditure by performer and by source,
2003foreign share lt 60.1 x 0.276 2.0 18.6
Total performers Independent research institutes Enterprises (of which LMEs) Institutions of higher education others
100 25.9 62.4 (46.8) 10.5 1.1
Total sources Government funds Enterprise funds (foreign firms share of VA) Foreign funds Other funds
100 29.9 60.1 (27.6) 2.0 8.0
6
Contributions of foreign vs. Domestic-funded LME
- RD
7
Is China experiencing a patenting
takeoff?Chinese patent applications,
1986-2004Source Hu and Jefferson (2004), based
on data from the website of Chinas National
Bureau of Statistics, www.nbs.stats.gov.cn
8
Are firms using RD to generate invention
patents? Impacts of RD and FDI on
patentingdomestic yes foreign no. Hu and
Jefferson, 2005
9
Findings

• The patenting of Chinese firms derives from RD
  and FDI, where the latter expands technological
  opportunity for patenting
• The patenting of foreign firms is largely
  autonomousi.e. it is weakly associated with RD
  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 RD

10
What is driving Chinas 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 RD
  spending.

11
An index of technology development that combines
the measure of RD intensity and patent intensity
12
(No Transcript)
13
How responsible is FDI for driving Chinas
technology development?

• ln(TechDev) ? ßln(FDI) e
• We estimate this equation using the observations
  for the 30 provinces shown in the two figures.
  R-square 0.843.
• 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.

14
The role of technology import marketsHu and
Jefferson (2006) find robust complementarities
between in-house RD spending and purchases of
imported RD, i.e. purchases of technology
imports increase the returns to in-house RD and
thus motivate RD spending.
15
Conclusion

• Foreign-funded RD is not driving China ST
  takeoff. The principal drivers are other foreign
  sources, i.e. FDI and market-mediated purchases
  of technology imports.

16
Is foreign funded RD 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 RD) Dependent variable Ln(basic RD)
Ln(cumulativeFDI/ total fixed assets) -0.039 (2.91)
Ln(sales) 0.013 (8.87)
Adj. R-square 0.004
17
Are the foreign funded research centers engaged
in basic research, which is displacing U.S.
research activity? Motives for establishing RD
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 masters
  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.

18
Conclusions.

• Is foreign-funded RD driving Chinas technology
  takeoff? NoBut FDI and imported technology
  markets are through their indirect effects on
  motivating RD and patenting by domestic firms
• Is the surge of foreign-funded RD in China
  undermining RD and innovation in the U.S.? Not
  the industrial enterprise based RDThe RD 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 RD
  centersHowever, these are likely to be engaged
  in localization and creating a learning curvenot
  yet in high end RD.

19
(No Transcript)
20
RD intensity by ownership type
21
Patent applications by ownership type
22
Industry distribution of foreign patent
applications Source Hu and Jefferson (2004),
based on calculations using the NBS large and
medium-size enterprise data.
23
An alternative hypothesis

• The issue is not international frontier
  innovations arising from foreign RD.
• Much foreign RD is used to adapt foreign
  designed products to local conditions it often
  does not involve much formal RD.
• The larger issue is technology transfera more
  primitive stage of technology advance.
• FDI motivates domestic RD. Domestic RD and FDI
  lead to imitation/innovation, new product
  development and patenting.