Catching up from above -the development of Chinese R&D based

competitiveness

Six countries programme, Helsinki 17-18/6 2004

Vicky Long & Staffan Laestadius

Our message in short

• Chinese firms rapidly develop competitiveness in the high (R&D intensive) end of ICT industry in general and within telecommunication in particular

• It challenges the dominant view on how international firms localize knowledge intensive activitites within a globalized economy.

• This is a preliminary report from the beginning of a research project on Chinese telecom strategies. In addition to the literature and statistics studied it is based on interviews with Chinese ICT actors.

The context: globalization!

• Castells (1996) and the network economy

• A reminder:

– Product cycle discussion - 60s (Vernon)

– The international firm discussion - 70s (Hymer)

– The international sourcing discussion - 70s (Fröbel)

– The Asian Tigers - 60-70s

• Globalized communication systems

The catching up phenomenon

• Europe on China - 15th century

• America on Europe - 19th century

• Japan on America/Europe - 20th century

• First tier Asian Tigers

• Second tier Asian Tigers

• Who´s next?

The catching up process

• Gerschenkron (1962)

• Flying geese or leapfrogging

• “Soft” leapfrogging - “real” leapfrogging!

• Strategies by gvts. - and by intl. firms!!

• Krugman (1994) and the “China syndrom”: quantitative or qualitative growth!

China - the figures!

• Trade: 92/02 growth with 380% to global rank 4• Manufacturing content in export: higher than most

industrialized countries• ICT export: same as Japan and EU• ICT import: world top group• Telecom market: biggest size & growth in the

world!• FDI: highest in the world (almost)!• Chinese firms are now going abroad

The consolidation of global business - the big business revolution

• The merger boom (M&A)

• The importance of the logo

• The importance of the strategic knowledge

• The competition along the value chain

• The global sourcing of activities

• Producing high-tech with no profit?

• Will Chinese firms break through?

The challenge

• Competition from Chinese actors directly in the high end and in industrialized countries

• Telecommunication - a chance for real leapfrogging for China?

• Competition on systems and technologies - in addition to design and interface - i.e. the high end of the R&D chain.

• Next follows the preliminary results from a massive set of interviews with Chinese actors.

Pearl River Delta (Jun, 2003)8 firms, 2 government bureaus 1 high-tech park and 1 university

Yangze River Delta (Jul, 2003)5 firms

Bohai Rim region Frist trip (Aug,2003)10 firms, 2 government authorities1 high-tech park, 1 university

Second trip(Jan,2004)4 firms and 1 development zone

27 ICT firms 4 Government authorities 2 high-tech parks 1 EDZs 2 Universities

Interviewed organizations

Interviews in China

China tour map

Interviews in China

Tranditional Division of Labour

• “Asset-exploiting R&D” or “home-based exploiting (HBE)”

• “Home-based augmenting (HBA)” remains concentrated in the developed economies

( c. f. Dunning, 2000; Criscuolo & Narula & Verspagen, 2001)

Identified two directions of international R&D flows

(conjectures) Many Western incumbent ICT firms move

HBA/advanced R&D activities to China and/or in China based firms

Chinese firms, after having successfully encroached market shares from foreign vendors at home and/or using the home market as an important “cash cow”, aggressively build up R&D labs in the advanced economies like USA and Sweden.

Western firm’s R&D labs in China

• Exploratory and strategic partnership stage (early - mid of 1990s): JV-based; “Show”

• Expansion of R&D investment stage (mid - late 1990s): intensive cooperation; exploring the “West”

• Consolidation of R&D stage (late 1990s - present):

China’s accession to WTO; Domestic development; consolidated, strategic FDI approach

Source: Henry L. Stimson center (Walsh K, 2003)

Three stages of high-tech MNC’ R&D investment:

MNCs’ R&D labs

• Developed regions (USA, Europe)

• NIEs (e.g. Acer, Kinpo Electronics, Viatech, Samsung, LG)

Two mechanisms favor this ICT R&D movement (conjectures):

• Development of local conditions

• The mobility of ICT technologies and industries

Rivalry, Matured Partners, Market Size (c.f.Walsh, 2003, Chen 2004)

Different structure and focus on R&D

• Spillovers (both ways)

• China - a sophisticated market?

• Social embeddedness

• Implication - Learning

Chinese establishment of overseas research labs

• “Walks on two legs”• Chinese firms/enterprises (e.g. TD-SCDMA )• Leading indigenous Telecom & Datacom vendors • Overseas labs

A Emerging Innovation Forces & Drives of Setting up Overseas Labs

Among 23 interviewed Chinese ICT firms, there are 18 firms who own 35 overseas labs

Geographic distribution of Chinese ICT firms' overseas R&D labs

Others ; 9%Japan; 6%

Korea; 11%

Europé; 26%

USA; 48%

Others

Japan

Korea

Europé

USA

Drivers

• Technology spillovers

• Semantic and contextual limitations of Absorptive capacity

• Center of excellence

• Global sourcing

The Activities of Overseas Labs - Four Steps and Onwards (observations)

• BI unit

• Cautious (budgeted) expansion & investigation

• A clear technological element/focus formed

• Convergence with local market needs (Contrary to its guerilla strategy---

”besieging and encircling from village to city”??? )

Scenario?

• Hurdles and Limitations

Country, industry, corporate-specific hurdles

• The leapfrogging possibility?

Implications

• Challenge to conventional wisdom on globalization processes?

High-tech & low tech concentration; Input-driven growth; Inward-orientation vs. outward-orientation;

• A global convergence of knowledge formation ?