Transcript TNCs and Innovation - China

The Role of Transnational
Corporations in the National
Innovation Systems
– The Case of China
Li Yanhua
Graduate University of Chinese Academy of Sciences,
Beijing, China
August 20, 2009
Opening-up and Innovation:
China is Facing Opportunities and Challenges
• Hot topics in China, which may be or will be
confronted with by other LDCs
– Be more open or be more self-reliance?
– How to develop from economic growth-oriented
country to innovation-oriented country?
– How transnationals have played and will play in the
technology innovation of domestic firms?
– How to cope with the opportunities and challenges
under globalization?
Objectives
• This paper:
– Focus on the role of TNCs in China national
innovation systems, including recent
evolution and perspectives.
– Give some implications for policymakers of
large and fast growing economies.
Outline
1
Analytical framework and evolution of China’s NIS
2 The position and evolution of TNCs
The local factors affecting innovation by TNCs and
3
local enterprises
4 The spillover of TNCs and linkages with local
enterprises
5
Out-forward FDI and domestic TNCs
6
Conclusions and implications
Analytical Framework
Government
Institutional
Arrangement
Intermediaries
Universities
Domestic R&D
Multinational R&D
Domestic Financing
channels
Local Firms
Foreign
subsidiaries
Overseas Financing
channels
Elementary education, Infrastructure,
Basic R&D Platform and NISs Platform
National innovation system with the participant of Transnationals
The position and evolution of TNCs
• Overall trends: China has remained the largest FDI recipient
among all developing economies, attracting $92 billion in 2008.
• Although there are many dissimilar opinions, strengthening the
introduction of foreign capital is continuing without interruption.
contracted FDI
actually utilized FDI
(100 millions of US dollars)
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
2000
1800
1600
1400
1200
1000
800
600
400
200
0
The position and evolution of TNCs
• Industry distribution: Relatively stable, but more investment has
been to capital-intensive or technology-intensive industries.
8.63%
9.61%
6.70%
5.37%
11.44%
13.06%
2.11%
2.84%
2.49%
63.48%
5.51%
63.59%
3.15%
2.03%
2000
2006
Manufacturing
Real estate
Leasing& business service
electric power, fuel gas and water
Wholesale&retail
Transport, storage and communications
Others
Figure : Inward FDI stock, by industry, 2000, 2006 (percent)
The position and evolution of TNCs
• sources of FDI: South, east and south east Asia has been the main
region of inward FDI, accouted for 84% in 2008. Japan, United States are
the main investors of developed countries.
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Hongkong
offshore
financial
centres
Singapore
Japan
Korea
U.S.
Taiwan
Figure 2: Share of main Investors in China, actually utilized FDI, 1995, 2005, 2008 (percent)
1995
2005
2008
The position and evolution of TNCs
• Effect of TNCs on economy:
• In a macro perspective, TNCs have promoted robust growth in all
economic indicators (GDP, exports, investment, employment and
R&D).
• One-third of industrial output, one half of export, a quarter of tax
revenue comes from inward FDI.
• The effect of FDI in high-tech manufacturing industriesis more
remarkable than other industries.
Figure 2: Share of Top 10 Investors in China, actually utilized FDI, 1995 and 2005 (percent)
The position and evolution of TNCs
• Effect of TNCs on economy
Added
value
23
pharmaceuticals
Electronics and
telecom
81
Computer and
office equipments
95
Medical equipments
and instruments
55
Export
21
Employment R&D
R&D
expenditure employees
16
22
14
Technology
import
20
93
73
42
38
93
99
91
82
64
99
88
36
27
19
33
Table : The importance of Foreign Investment Enterprises in Chinese high tech industries, 2004, (Percent)
Source: Lundin et al., 2006
Foreign firms import high-tech components (e.g. advanced semiconductors,
engineered plastics, and software) into their subsidiary plants for final testing,
packaging before exporting them to their final market destinations.
The position and evolution of TNCs
• Effect of TNCs on economy
The share of new product output and export of foreign companies is increasing
in recent years. About 42% new product output come from foreign firms and
the percentage in high-tech industry is more prominent.
Manufacturing industry
1998
1999
2000
2001
2002
2003
2004
New product
output
27
32
35
38
37
41
42
New product
export
44
44
57
57
53
58
67
High-tech industry
New product
output
43
52
57
63
59
57
68
New product
export
81
79
83
81
70
78
88
Table : The position of foreign companies in new product output and export, 1998-2004, (Percent)
Source: Lundin et al., 2006
The position and evolution of TNCs
• New trends: transition of investment strategies
Main motivation
Pursue more expecting profit
Develop manufacturing base
Extend market share in China
Maintaining competitive advantage of low cost
Compet with transnational competitors
Improve R&D capability in China
Follow with existing customers
Rank (Rank)
(2001)
2005
3
1
2
2
1
3
4
4
5
5
7
6
6
7
Source: Zhao jinghua, 2002, 2006
Four kinds of strategical roles of TNCs’ subsidiary companies: manufacturing
base, market exploiting, risk avoidance, knowledge acquisition.
The position and evolution of TNCs
80
70
• New trends:
60
50
• Speeding up
localization
40
30
20
10
0
19791998
1999
2000
Joint Venture
2001
2002
2003
Cooperation Venture
2004
12
60000
10
50000
8
40000
6
30000
4
20000
2
10000
0
0
1995
2000
2001
2002
2003
2006
Wholly owned subsidiary
70000
1990
2005
2004
M&A value
Inward FDI
Percent of M&A in
inward FDI
• Strengthening
control to
affiliates
• Acquiring
Chinese firms
Local factors affecting innovation by TNCs
• Government policies towards TNCs
1979-1992
1993-
• The Law on SinoForeign Equity Joint
Ventures
• Industry guideline for FDI,
determine encouraged industries
• Equity-based joint
ventures (JVs) were
the dominant entry
mode
• Favorable policy
packages, non-national
treatment to TNCs
• Promoted middle&west
investmet of FDI
• Grant the national treatment to
TNCs
Local factors affecting innovation by TNCs
• Government policies towards TNCs
Year
Stage
1979- Prudent
1985
1986- Active
1992
Policy
Gradual opening-up
and accumulation of
experience
Encouraging
exportation and
introducing
technologies
1993- Adjusted FDI industrial
2000
adjustment, emphasis
on technologies,
talents and managerial
experience
2001- More
Promoting indigenous
Deep and innovation, learning
widly
from TNCs
Main Sources of
FDI
Industry distribution of
FDI
Hong Kong,
Macao, main
SMEs
The tertiary industry, textile
and Clothing
Taiwan, Japan
and South Korea
Middle and large-scale
projects including energy,
transportation, electronics
and machinery
Infrastructure, basic
industries and technologyintensive industries, modest
opening-up of finance
industry
More deep opening-up of
all industries except
individual ones (e.g.
railway transportation)
Large-scale
TNCs of the
Asia, U.S. and
Europe
Large-scale
TNCs of the
Asia, U.S. and
Europe
Local factors affecting innovation by TNCs
2001－
Comprehensive
Opening-up
1993－2000
Positive
Opening-up
2001：Formal Entry into WTO
2002：Category for Guidance for Foreign Investment Industries
2004：Revise Category for Guidance for Foreign Investment Industries
2007：Revise Category for Guidance for Foreign Investment Industries
2008：Revise The law of People’s Republic of China on Enterprise
Income Tax
1995：Revise Category for Guidance for Foreign Investment Industries
1995：Category for Guidance for Foreign Investment Industries
1997：Revise Category for Guidance for Foreign Investment Industries
1999：Encourage technology development and innovation of
foreign-funded enterprise
1986－1992
Active
Opening-up
1986：Provisions for The Encouragement of Foreign Investment
1987：Interim Provisions on Guiding
the Absorption of Foreign Investment Direction
1988：Law on Chinese Foreign Contractual Joint Ventures
1990：Open the Pudong New Area of Shanghai
1991：Rules for the Implementation of the Income Tax Law
for Enterprises with Foreign Investment and Foreign enterprises
1978－1985
Prudent
Opening-up
1979：Law on Sino-Foreign Equity Joint Ventures
1980：Open four special economic zones
1984：Open fourteen coastal port cities
1985：Establish economic open zones successively
7992
2001-2006
112410
4539
1994-2000
63972
2061
1986-1993
33779
161
1978-1985
15206
Unit: $ 100 Millions
FDI
Figure 3：Main Policies On Foreign Investment Of China
GDP
Local factors affecting innovation by TNCs
• Government policies towards TNCs
• supportive policies for assimilating innovative foreign technologies
– Key national projects are required to develop a plan to build indigenous
innovation capacity by assimilating imported advanced technology.
– The list of technologies that are encouraged or restricted for import will be
adjusted.
– Support innovations based on assimilation of imported advanced technologies
by giving high priority to key national projects.
– Support cooperation among industries, universities, and research institutes as
they assimilate imported advanced technologies.
Local factors affecting innovation by TNCs
• The role of local universities
• The extensive involvement of public research in industry R&D in China
constitutes an important character of her National Innovation System.
• Most of resouces concentrate on national or local leading universities.
• Promoting science-industry cooperation has been a crucial innovation
policy, but the effect is still unsatisfying.
• Joint R&D projects or organizations between TNCs and leading
universities concentrate on more advanced R&D than domestic firms,
beside this, talent development and training are also main functions.
• Local firms often lack abilities to compete with TNCs in signing such
projects: crowding-out effect?
Local factors affecting innovation by TNCs
• The role of local universities
Joint R&D organizations
TNCs
Home country
Qinghua-BP Clean Energy Research and
Education Center
BP
Freescale Singlechip and DSP Applying and
Development Research Center
Motorola
Qinghua-Toyota Research Center
Toyota
Japan
Qinghua-Daikin Research Center
Daikin
Japan
Qinghua-AREVA Controlling Research Center
AREVA
France
Qinghua- Mitsubishi Joint R&D center
Mitsubishi
Japan
Qinghua- Renesas Integrate Circuit Designing
research institute
Renesas Technology
Qinghua-Intel Joint R&D Center
Intel
U.S.
Delphi-Qinghua Auto System Research Center
Delphi
U.S.
Qinghua-Tianshi Software R&D Center
Hongkong Tianshi
Hongkong, China
Table : Some Joint R&D organizations of Qinghua University with TNCs
U.K.
U.S.
Japan
Local factors affecting innovation by TNCs
• Other factors
• IPR
• Since China joined the WTO and signed the Agreement on TradeRelated Aspects of Intellectual Property Rights (TRIPS agreement), the
Chinese patent system is in line with international standards.
• Still weak. Infringement of intellectual property rights, particularly of
copyright and trademarks, remains a concern.
Local factors affecting innovation by TNCs
• Other factors
• Education and S&T human resources
•
China has been the largest countries in terms of the number of enrolled
undergraduates and post-graduates.
• Since the early 1990s China has made substantial progress in
developing S&T human resources.
• The density of scientists and engineers engaged in R&D per million
people in China is still relatively low
Local factors affecting innovation by TNCs
• Other factors
• Education and S&T human resources
Table : scientists and engineers in R&D personnel
The spillover of TNCs
The role of TNCs remain controversial in China. The empirical
evidence on whether FDI facilitates technology spillovers is
ambiguous in China.
• Productive technology spillovers
• There are positive productivity spillovers from foreign firms to
their local suppliers in upstream sectors in China (e.g. Buck, Liu,
Wei, & Liu, 2007; Buckley, Clegg, & Wang, 2002; Kueh, 1992; Li,
Lam, Karakowsky, & Qian, 2003; Wu, 1999; Zheng, Siler, &
Giorgioni, 2004; Zhu & Tan, 2000).
• Local firms have improved and expanded production capabilities
rather than innovation capabilities.
The spillover of TNCs
• Core or advanced technology spillovers
• When it comes to the effect of TNCs on domestic innovative
technological development, the study proved not so optimistic.
• Auto production is almost fully carried out under license from
foreign manufacturers. Most product development is based on
reverse engineering, and no significant indigenous technological
development has yet occurred.
Table : scientists and engineers in R&D personnel
The spillover of TNCs
• Training spillovers
• Mobility of trained labor is a very important channel for
technology spillover in China.
• The main channel of TNCs’ technology diffusion is the mobility
of human resources, especially senior managers and researchers,
who came into domestic firms for development, or operated their
own start-ups (R&D institute of Motorola in China).
Table : scientists and engineers in R&D personnel
The spillover of TNCs
• Linkages between TNCs and local firms
• Technical cooperation
• The top 3 technical cooperation partners of TNCs is: parent
company, clients, foreign suppliers (A survey performed to TNCs in
Shanghai high-tech park,2007 ).
• 75% TNCs didn’t set technology alliances with local firms, 67%
TNCs had no intent to give technological support to local firms (A
survey performed to 400 foreign companies ,2005 ).
• Some local companies with strong R&D abilities (like Huawei,
Haier, Chang’an and Little Swan) have cooperated with TNCs in
recent years to form positive and interactive know-how exchange.
The spillover of TNCs
• Linkages between TNCs and local firms
• CaseⅠ: Knowledge transfer between local suppliers and TNCs
City
Wuxi City
• the most important integrated circuit design
and manufacturing centers in China;
• has attracted prestigious foreign firms, such
as Siemens, Panasonic, Toshiba, Sony,
General Electric, etc.
Industry
the electrical and
electronics
• Attracted the highest amount of FDI with a
growth rate of 25% annually;
• the demand for parts/components from
suppliers is significant.
Data
a survey distributed to
50 TNCs, by Duanmu
and Fai (2007)
The spillover of TNCs
• Linkages between TNCs and local firms
• CaseⅠ: Knowledge transfer between local suppliers and TNCs
• Findings:
• 56% firms have purchasing arrangements with suppliers in China,
only 23.7% suppliers were indigenous Chinese firms; the others (76.3%)
were foreign suppliers.
• Demonstration effect: FDI introduces an “existing proof” of viable
paths of development. Imitation usually happened.
• There are technology spillovers between backward linkages from
TNCs to local suppliers, but the transferred knowledge are mainly
basic managerial and technological knowledge.
• Knowledge transfer are mainly one-way pattern that mostly
dominated by the TNCs, interactive transfer is seldom.
The spillover of TNCs
• Linkages between TNCs and local firms
• CaseⅠ: Knowledge transfer between local suppliers and TNCs
• Findings:
knowledge transfer between TNCs and local suppliers
Stage
Knowledge type
Knowledge
Linkages
initiating
stage
Basic codified
information
Product blueprints and
manuals
Dominated by
the TNC
developing
stage
Managerial
knowledge
Business culture
Quality control, product
cost controls, materials
management, etc
Dominated by
the TNC
intensifying
stage
Tacit knowledge
Joint problem solving ,
Cooperation
Interactive
knowledge
transfer
The spillover of TNCs
• Linkages between TNCs and local firms
• CaseⅠ: Knowledge transfer between local suppliers and TNCs
• Findings:
• The relationship is mainly determined by local suppliers’ capability
and TNCs’ strategy. Technically, the gap between the two is huge as
Chinese firms lack sophisticated technological knowledge.
• The nationality of the TNC: Japanese TNCs are more passive in their
assistance to the suppliers whereas American and European firms seem
to be more proactively.
The spillover of TNCs
• Linkages between TNCs and local firms
• CaseⅡ: Linkages in the industry culster
Suzhou industry cluster:
• A quite typical industry cluster in China’s manufacturing
landscape
• The driving power of the cluster is large-sized TNCs
• Export orientation, very open.
Suzhou new development
park
Suzhou industrial garden
Establishing time
1990
1994
GNP (up to 2002)
20.4 billion RMB
25.2 billion RMB
Inward FDI (up to 2002)
7.1 billion US dollars
5.43 billion US dollars
Representative industries
Computer assembly
Semiconductor IC industry
The spillover of TNCs
• Linkages between TNCs and local firms
• CaseⅡ: Linkages in the industry culster
• Findings:
• The entrance of TNCs promoted the forming of industry cluster in Suzhou.
• Great contribution to local employment (more than 80%) and labor training.
• The cooperation and backward linkages between foreign and domestic
firms is unsatisfying. Low local procurement level
• Innovative activities of MNCs: recipient and user of technologies according
parent company
• Domestic firms: Manufacturing capability has been developed, innovation
capacity is still limited
The spillover of TNCs
• Linkages between TNCs and local firms
• CaseⅡ: Linkages in the industry culster
• Findings:
• TNCs have hold the upper-end of value chain in IT and semiconductor
industry, local companies are still competing in the lower value chain
excepting some fast learning firms.
Suzhou new development park
Suzhou industrial garden
Industry
IT manufacturing
Semiconductor
Value
Chain
Electronic components, computer
equipment, digital products
IC design, production, packaging and
testing
Key Player
Benq (Taiwan), Logitech
(Switzerland), Siemens (Germany),
Panasonic (Japan), Yamaha (Japan),
Philips (Holland)
IC Design: Innosis, ESMT,
VeriSilicon, AMD (United States)
Packaging and Testing: Samsung
(Korea), Hitachi (Japan), Fairchild
Semiconductor (United States)
The spillover of TNCs
• R&D activites in China
• China is now the most promising R&D investment
destinations for TNCs, topping the United States and India
(A.T.Kearney 2006 and UNCTAD 2005).
• R&D institutes: 200 in 2001, 1160 in 2006
• Motivation: make use of a growing pool of skilled
engineers and technicians to cut their research expenditure
• government pressure
The spillover of TNCs
• R&D activites in China
Some R&D centers invested in China by TNCs
ICT industry
Biopharmaceutical
industry
Automobile Industry
IBM
AstraZenenca
Shanghai GM
Sun
Novo Nordisk
Shanghai Volkswagen
Nokia
Eli Lily
Nissan
Ericsson
Roche
Daimler Chrysler
Microsoft
DSM
Honda
Fuji
Lonza
Toyota
Motorola
GE
Hyundai
HP
Siemens
The spillover of TNCs
• The negative role of FDI
• Industry Control & market monopoly
• Foreign firms have introduced leading-edge, branded
products that many Chinese vastly prefer to those made by
domestic firms.
• 90% of China’s export has been foreign brands or OEM.
• Top 5 companies in every industries that has been opened
are almost foreign firms
The spillover of TNCs
• The negative role of FDI
• Industrial Control & market monopoly
• Through joint venture, many domestic brands have vanished
and become OEM plants of TNCs.
 Beverage: 7 of 8 domestic brands have vanishied, which have
changed to produce Coco cola or Pepsi cola.
 Cosmetics: almost all primary brands are foreign brands.
 Others: Camera, Bicycle, Cleaning product, Auto……
The spillover of TNCs
• The negative role of FDI
• Crowding-out effect
• Industrial structure similarity coefficient of FDI: 0.497 in 1985,
0.824 in 1995
• More fierce competition
If TNCs introduce more new technology and products to China,
rather than invest in exsisting manufacturing industries,
crowding-out effect will decrease.
The spillover of TNCs
• The negative role of FDI
• Technical control
• Utilizing advanced technology to control high-end market
• Build production base through joint venture, call off R&D
centers of Chinese partners
• Local firms are more dependent on TNCs technology
• Brain drain of R&D talents
Out-forward FDI and domestic TNCs
• General trend
• China’s outflows increased to $52.15 billion (include offshore
financial investment) in 2008, and its outward FDI stock reached
$170 billion.
521.5
2008
Source: Ministry of Commerce of China, 2008
Out-forward FDI and domestic TNCs
• General trend
• Industry distribution: Wholesale & retail, Trade related services,
Transport and storage, Mining, Manufacturing
• Destination: main to developing economies in Asia and Latin
America, but the investment in developed countries has increased.
Top 15 destination of Chineses outward FDI, by stock, up to 2007 (100 millions of dollars)
Rank
Country/ area
Value
Share to all
1
Hongkong
687.8
58%
2
Cayman Islands
168.1
3
British Virgin lslands
4
Rank
Country/ area
Value
Share to all
9
Korea
12.1
1%
14%
10
Pakistan
10.7
1%
66.3
6%
11
England
9.5
1%
U.S.
18.8
2%
12
Macao
9.1
1%
5
Australia
14.4
1%
13
Germany
8.5
1%
6
Singapore
14.4
1%
14
South Africa
7
1%
7
Russia
14.2
1%
15
Indonesia
6.8
1%
8
Canada
12.5
1%
Subtotal
996.5
85%
Total
1179.1
100%
Out-forward FDI and domestic TNCs
• Local TNCs
• China has 3429 parent companies in 2005 (UNCTAD, 2006).
• Most of them are relatively small TNCs with a limited
geographical reach.
• But the number of large TNCs is on the rise.
• M&As (mergers and acquisitions) has become a major mode of
entry into developed-country markets by TNCs from China.
Out-forward FDI and domestic TNCs
• Local TNCs
Typical outward FDI cases deals by Chinese TNCs to developed economies
Year
Local TNCs
Invested project
Host economy
Entry mode
FDI value
1986
CITIC
Wood and wood
products
U.S.
JV
40 millions of RMB
1986
CITIC
Paper and paper
products
Canada
M &As,
50% share
60 millions of
Canada dollars
1987
CMIEC
Mining
Australia
JV
1999
Haier
Household electronic
appliances
U.S.
Wholly
owned
2001
Huali
Mobile communication
U.S.
M &As
$1 million
2003
CNOOC
Natural gas
Great Britain
M &As
$0.615 billion
2003
TCL
TV, DVD
France
M &As
0.3 billion Euro dollars
2004
Lenovo
Personal computer
U.S.
M &As
$ 12.5 billion
Conclusions and implications
• Conclusions
• FDI has been a crucial role in China’s development (GDP, industry
structure, employment, export, technology import)
• Opening-up is a effective channel for the learning of latecomers
• Most technical standard are holded by TNCs
• Only by learning, can latecomers catch the opportunity for
shorten technology gap with developed countries.
• Many Chinese firms have accumulated productive, managerial,
and R&D knowledge through demonstration effect, competition
effect, or direct and indirect learning from TNCs.
•
Conclusions and implications
• Conclusions
• BUT:
• Technology spillover is unsatisfactory
• Cooperation between TNCs and other parts of NIS is limited
• Technical linkages between TNCs and local suppliers are limited
• Productive capability has been significantly improved, but not the
innovative capability
• Negative effect of TNCs
• Lacking of absorptive capacity or unwillingness to learn through
technology import or joint venture with TNCs, is a main reason for
low innovative capability of Chinese firms.
Conclusions and implications
• Conclusions
• Main mode of Joint ventrue in China is based on capital or land,
and is wholly owned by TNCs. Such mode will be very effective for
the country that lack of capital and experience, but its marginal
effect will decrease with the increasing capital size of inward FDI.
• Nowadays, improving innovative ability of firms should be a main
objective through FDI for developing economies in international
situation.
• So, how to design FDI policies and made them adaptive to
constantly changing of situation?
Conclusions and implications
• Implications
• Improving impartial competition environment for domestic and
foreign firms
• Focusing on the investment in strategic industries, guiding the
flow direction of FDI
• Facilitating technology transfer through linkages, promoting
transnational technical cooperation
• Building local firms’ absorptive capacities, make enterprises to
be the main body of NIS, not the publich research system.
• Learning to compete in international rules
Thank you