the influence of ipr on the offshoring of innovation

The influence of IPR on the offshoring of innovation

activities: governance choices, and location strategies

adopted by MNCs in China

A thesis submitted to The University of Manchester for the degree of

Doctor of Philosophy

in the Faculty of Humanities

2019

Jie Hong

Alliance Manchester Business School

University of Manchester

2

List of contents

List of contents ............................................................................................................. 2

List of figures ............................................................................................................... 5

List of tables ................................................................................................................. 8

List of abbreviations ................................................................................................... 10

Abstract ...................................................................................................................... 12

Declaration ................................................................................................................. 13

Copyright statement .................................................................................................... 14

Acknowledgement ...................................................................................................... 15

Chapter 1 Introduction ................................................................................................ 16

1.1 Offshoring business services .............................................................................. 16

1.2 Factors behind offshoring decisions ................................................................... 19

Chapter 2 Positioning and overview of the three research papers ................................. 23

2.1 Why China? ....................................................................................................... 23

2.2 Paper 1: The evolution of the Chinese IPR system: Phases of change and impact

on innovation activities ............................................................................................ 27

2.3 Paper 2: The influence of the institutional environment in host countries on

offshore governance choice and business outcomes ................................................. 29

2.4 Paper 3: Why do multinational firms locate R&D to China? An analysis of the

determinants of location strategies ........................................................................... 31

2.5 The Overall Research Framework of the Thesis ................................................. 33

Chapter 3: The evolution of the Chinese IPR system: Phases of change and impact on

innovation activities .................................................................................................... 35

3.1 Introduction ....................................................................................................... 35

3.2 The IP systems in China .................................................................................... 38

3.2.1 Administrative track .................................................................................... 38

3.2.2 The judicial track ........................................................................................ 41

3.3 The evolution of Chinese IPR related laws......................................................... 43

3.3.1 Legislative guidance.................................................................................... 44

3.3.2 An overview of evolutionary changes in the Chinese IP system ................... 45

3.3.3 First wave of revisions (1990s) .................................................................... 52

3.3.4 Second wave of revisions (2000s) ............................................................... 54

3.3.5 Third wave of revisions (since 2008) ........................................................... 60

3.4 IP protection enforcement and IP activities in China .......................................... 65

3

3.4.1 IP protection enforcement in China ............................................................. 66

3.4.2 IP activities in China: patent application and grant, trademark registration .. 75

3.5. Discussion and Conclusion ............................................................................... 83

References ............................................................................................................... 88

Appendix A1 A brief summary of the key aspects of IP law have been revised ........ 92

Appendix A2 Utility model patents and design patents application and granting .... 101

Chapter 4: The influence of the institutional environment in host countries on

innovation offshore governance choice and business outcomes ................................. 107

4.1 Introduction ..................................................................................................... 107

4.2 Offshoring business services and governance choices ...................................... 110

4.2.1 Factors influencing offshore governance choices ....................................... 111

4.2.2 The pros and cons of different offshore governance modes........................ 114

4.2.3 Contribution to the literature and research questions .................................. 115

4.3 Data ................................................................................................................. 116

4.4 Factors influencing offshoring (Descriptive data analysis results) .................... 119

4.4.1 Factors driving offshoring ......................................................................... 120

4.4.2 Risk factors affecting offshoring ............................................................... 122

4.4.3 Outcomes achieved via offshoring ............................................................. 124

4.5 Regression results ............................................................................................ 126

4.5.1 First stage: governance choice ................................................................... 127

4.5.2 Second stage: offshore outcomes ............................................................... 131

4.5.3 First stage results: Factors behind offshore governance choices ................. 135

4.5.4 Second stage results: The relationships between the governance

misalignment, the institutional factors, and the achievement of certain outcomes 136

4.5.5 Robustness Checks .................................................................................... 146

4.6 Discussion and conclusion ............................................................................... 147

References ............................................................................................................. 153

Appendix B1: Robustness check ............................................................................ 160

Chapter 5: Why do multinational firms locate R&D to China? An analysis of the

determinants of location strategies ............................................................................ 165

5.1 Introduction ..................................................................................................... 165

5.2 Developing a conceptual framework for MNCs location strategies .................. 167

5.2.1 Location strategies .................................................................................... 167

5.2.2 The role of resources and institutions in locations strategies: a conceptual

framework ......................................................................................................... 169

5.3 Sampling and data ........................................................................................... 173

4

5.4 The evolution of the choices of different location strategies MNCs have adopted

in China................................................................................................................. 177

5.5 Influencing factors and location strategies ....................................................... 183

5.5.1 Variables ................................................................................................... 183

5.5.2 What factors affect the location strategies that firms adopted in China? ..... 187

5.5.3 Robustness Check ..................................................................................... 194

5.6 Discussion and conclusions ............................................................................. 196

References ............................................................................................................. 201

Appendix C1: The data details of share of location strategies (4 intervals) ............. 208

Appendix C2: The share of location strategies (5 intervals) ................................... 209

Appendix C3: The share of location strategies (yearly) .......................................... 211

Appendix C4: Exploitative patent vs. explorative patent ........................................ 213

Appendix C5: Fixed effects regression results of pharmaceutical industry and

electronics industry respectively ............................................................................ 217

Chapter 6 Conclusions .............................................................................................. 218

6.1 Summary of findings ....................................................................................... 218

6.1.1 Summary of findings: The evolution of the Chinese IPR system - Phases of

changes and impact on innovation and international business ............................. 219

6.1.2 Summary of findings: The influences that institutional environment in host

countries have on the choice of offshore governance mode and firm performance

.......................................................................................................................... 220

6.1.3 Summary of findings: Why do multinational firms locate R&D to China? An

analysis of the determinants of location strategies .............................................. 222

6.2 Contributions and implications ........................................................................ 225

6.3 Limitations and future research ........................................................................ 227

References ............................................................................................................. 230

Total word count (including footnotes but excluding references and appendices): 53,724

5

List of figures

Figure 1.1: 2017 A.T. Kearney Global Services Location Index - Top attractive

destinations for global service offshoring (Gott & Sethi, 2017). .................................. 18

Figure 2.1: GDP (constant 2010 billion US$) of China, Brazil, India, Russia, UK, and

US from 1995 to 2017. ................................................................................................ 24

Figure 2.2: GDP per capita (constant 2010 US$) of China, Brazil, India, Russia, UK,

and US from 1995 to 2017. ......................................................................................... 24

Figure 2.3: Enrolment in tertiary education (all programmes) from 1995-2016. ........... 25

Figure 2.4: FDI net inflows (BoP, current million US$) of China, Brazil, India, Russia,

UK, and US from 1990 to 2017. .................................................................................. 26

Figure 2.5: Positioning of the three papers .................................................................. 34

Figure 3.1: The main responsibilities of the major administrative bodies involved in IP

activities. .................................................................................................................... 40

Figure 3.2: Judicial system in China. ........................................................................... 42

Figure 3.3: The legislative system of China. ................................................................ 45

Figure 3.4: Number of patent dispute cases received by SIPO from 1997-2017. .......... 66

Figure 3.5: Number of counterfeit patent cases and cases of passing off others’ patents

handled by SIPO from 1988-2017. .............................................................................. 67

Figure 3.6: Number of trademark infringement cases investigated by SAIC from 1997-

2016. ........................................................................................................................... 69

Figure 3.7: Total value of fines imposed by SAIC on trademark infringement cases from

1997-2016 (in million £). ............................................................................................ 70

Figure 3.8: Average value of fines imposed by SAIC on trademark infringement case

from 1997-2016 (in £). ................................................................................................ 70

Figure 3.9: Number of new IPR-related civil cases of first instance accepted by local

people’s courts from 2004-2016. ................................................................................. 71

Figure 3.10: Number of new IPR-related civil cases of first instance concluded by local

people’s courts from 2004-2016, by the origin of interested parties. ............................ 72


people’s courts from 2004-2016, involving foreign interested parties (excluding Hong

Kong, Macao, and Taiwan). ........................................................................................ 72

Figure 3.12: Number of new IPR-related criminal cases of first instance concluded by

local people’s courts from 2004-2016, by the types of act. .......................................... 74

Figure 3.13: Number of suspects are sentenced in the new IPR-related criminal cases of

first instance concluded by local people’s courts from 2004-2016, by the types of act. 74

Figure 3.14: Total number of invention patents applications from 1995-2016 in China.

................................................................................................................................... 76

6

Figure 3.15: Total number of invention patents applications by foreign applicants from

1995-2016 in China..................................................................................................... 77

Figure 3.16: Number of invention patents applications by foreign applicants from four

different countries and regions from 1995-2016 in China. ........................................... 77

Figure 3.17: Total number of invention patents granted from 1995-2016 in China. ..... 78

Figure 3.18: Total number of invention patents granted to foreign applicants from 1995-

2016 in China. ............................................................................................................ 79

Figure 3.19: Number of invention patents granted to foreign applicants from four

different countries and regions from 1995-2016 in China. ........................................... 79

Figure 3.20: Total number of three types of patents applied by domestic applicants from

1995-2016 in China..................................................................................................... 80

Figure 3.21: Total number of three types of patents granted by domestic applicants from

1995-2016 in China..................................................................................................... 80

Figure 3.22: Number of applications of trademark registration (domestic applicant) from

1982-2017. .................................................................................................................. 81

Figure 3.23: Number of applications of trademark registration (foreign applicant) from

1982-2017. .................................................................................................................. 82

Figure 4.1: Conceptual framework. ........................................................................... 114

Figure 4.2: Firms’ preference for driving factors behind offshoring decision of

innovation and other business services, by different governance mode in varied

locations. .................................................................................................................. 121

Figure 4.3: Firms’ preference for risk factors behind offshoring decision of innovation

and other business services, by different governance mode in varied locations. ......... 123

Figure 4.4: Firms’ preference for the achievements behind offshoring decision of


locations. .................................................................................................................. 125

Figure 5.1: 4 types of location strategies of FDI in R&D. .......................................... 169

Figure 5.2: Resources, institutions and location strategies. ........................................ 172

Figure 5.3: The share of patents that include inventors in China based on patents filed

from 1990-2014 in both computer and electronics industry and pharmaceutical industry.

................................................................................................................................. 179

Figure 5.4: The share of family size of patents that include inventors in China based on

patents filed from 1990-2014 in both computer and electronics industry and

pharmaceutical industry. ........................................................................................... 179

Figure 5.5: The share of citations of patents that include inventors in China based on


pharmaceutical industry. ........................................................................................... 180

Figure 5.6: The evolution of the share of each location strategies of electronics firms

(host country: China). ............................................................................................... 181

7

Figure 5.7: The evolution of the share of each location strategies of pharmaceutical

firms (host country: China). ...................................................................................... 181


firms (host country: other). ........................................................................................ 182


(host country: other). ................................................................................................. 183

8

List of tables

Table 3.1: Milestones of the evolution of Chinese IP system: from 1978 – present ...... 48

Table 4.1: Number of implementations of each governance mode regarding different

functions by location. ................................................................................................ 118


functions by industry. ................................................................................................ 119

Table 4.3: Variable description (first stage) ............................................................... 129

Table 4.4: Descriptive statistics and correlations for explanatory and control variables

（first stage） .......................................................................................................... 130

Table 4.5: Variable description (second stage) .......................................................... 132


（second stage） ...................................................................................................... 134

Table 4.7: First-stage: governance choices (probit regression model) ........................ 136

Table 4.8: Second-stage regression results. Dependent variables: probability of

achieving the outcomes of “better focus on core competencies” and “better access to

qualified personnel” .................................................................................................. 138


achieving the outcomes of “improved organisational flexibility” and “increase in firm's

overall competitiveness”. .......................................................................................... 140


achieving the outcomes of “increased productivity/efficiency” and “improved service

quality”. .................................................................................................................... 142


achieving the outcomes of “Better access to new markets” and “Breakthrough process

improvement(s)”. ...................................................................................................... 144

Table 4.12: Summary of the regression results. ......................................................... 146

Table 5.1: An overview of the sample. ...................................................................... 176

Table 5.2: Variables definition and operationalisation. .............................................. 186

Table 5.3: Descriptive statistics and correlations for explanatory and control variables:

the share of four location strategies that firms adopted in China in electronics industry.

................................................................................................................................. 188

Table 5.4: Descriptive statistics and correlations for explanatory and control variables:

the share of four location strategies that firms adopted in China in pharmaceutical

industry. .................................................................................................................... 189

Table 5.5: Fixed effects regression results of pharmaceutical industry and electronics

industry respectively. Dependent variable: the share of technology building and

technology augmenting strategies adopted in China (baseline). ................................. 190

9


industry respectively. Dependent variable: the share of market seeking and technology

exploiting strategies adopted in China (baseline). ...................................................... 191



technology augmenting strategies adopted in China. ................................................. 193



exploiting strategies adopted in China. ...................................................................... 194

Table 5.9: SUR regression results of pharmaceutical industry and electronics industry

respectively. Dependent variable: the share of technology building and technology

augmenting strategies adopted in China. ................................................................... 195


respectively. Dependent variable: the share of market seeking and technology exploiting

strategies adopted in China........................................................................................ 195

10

List of abbreviations

BRIC – Brazil, Russia, India, China

CIBER – Duke University Centre for International Business Education and Research

CNIPA – National Intellectual Property Administration of PRC

CPC – Communist Party of China

CPCC – Copyright Protection Centre of China

EPO – European Patent Office

FDI – Foreign Direct Investment

GDP – Gross Domestic Product

GSLI – Global Services Location Index

HBA – Home-base augmenting

HBE – Home-base exploiting

IB – International Business

IP – Intellectual Property

IPC – International Patent Classification

IPR – Intellectual Property Rights

JPO – Japanese Patent Office

MNC – Multinational corporation

MS – Market Seeking

MOU – China-US: Memorandum of Understanding on The Protection of Intellectual

Property

NBER – National Bureau of Economic Research

NCAC – National Copyright Administration of PRC

NPC – National People's Congress

ORN – Offshoring Research Network

PATSTAT – Patent Statistical Database

PCT – Patent Cooperation Treaty

R&D – Research and Development

RBV – Resource Based View

PRC – People’s Republic of China

RQ – Research Question

11

RTA – Revealed Technology Advantage

S&E – Science and Engineering

SAIC – State Administration for Industry and Commerce

SIPO – The State Intellectual Property Office

TA – Technology Augmenting

TB – Technology Building

TCE – Transaction Cost Economics

TE – Technology Exploiting

TRIPS – Trade-Related Aspects of Intellectual Property Rights

TS – Technology Seeking

UK – United Kingdom

US – United States of America

USPTO – United States Patent and Trademark Office

USTR – United States Trade Representative

VIF – Variance inflation factor

WCT – WIPO Copyright Treaty

WEF – World Economic Forum

WGI – Worldwide Governance Indicators

WIPO – World Intellectual Property Organization

WPPT – WIPO Performances and Phonograms Treaty

WTO – World Trade Organisation

12

Abstract

Since offshoring of labour-intensive manufacturing activities started in 1960s, there have

been significant transformations in these activities: more advanced activities are offshored,

resource seeking has become an important driving force, and emerging economies have

become increasingly popular as destinations. Several studies have analysed the factors

behind offshoring decisions, however, few studies have comprehensively researched the

effect of Intellectual Property Rights (IPR) on offshoring decisions. In particular, as a very

popular offshoring destination, China attracts billions of investments every year, but

existing literature on offshoring in China offers limited insight regarding the country’s

Intellectual Property (IP) protection and its effect on multinational corporations’ (MNCs)

offshoring decisions in China. This PhD thesis addresses the role that institutional factors

(especially IPR) play when MNCs offshore their innovation activities to China focusing on

three specific elements: the evolution of IPR in China, institutional factors affecting

governance choices of offshoring innovation activities, and the evolution of offshoring

strategies by foreign pharmaceutical and ICT companies in China.

First, we analyse in depth the development of the IP system in China and its effect on IP

behaviour. Our analysis shows that the quality of IP laws is greatly improved, and

compliance with the minimum requirements of TRIPS have brought the most radical

improvement to the Chinese IP laws around year 2000. The IP activities share a similar

development pattern to the IP system development in China, which indicates a coevolution

of innovation activities and IP development.

Second, we investigate the governance of offshoring decisions of MNCs in China, seeking

to understand the role of institutional framework conditions, in particular the IPR system,

on governance decisions. The regression results show that rule of law in host countries has a

positive effect on the probability of choosing captive mode, while the IPR protection is

negatively related to such choice. We further find that institutions (rule of law and IPR)

affect the achievement of certain offshore outcomes (e.g., focus on core competencies,

improve organisational flexibility).

Third, we analyse whether the location strategies MNCs adopted in China evolve while the

IPR protection is developing, and whether the IPR protection affects MNC’s choice of

location strategies. We find that locating R&D activities to China is motivated by exploring

the technology areas where China has an advantage, while the importance of market

seeking and technology increases overtime. The regression results show that institutional

factors (rule of law, IPR) affect MNC’s choice of location strategy, in particular, the IPRs

protection strength of China is positively related to the share of strategies in which China

has no relative technological specialisation.

The overall contribution of this research is to enhance the knowledge of the evolution of

IPR (legislation and enforcement) in China, and the importance of institutional factors

(especially IPR) in offshoring innovation decisions. It provides guidance for MNC when

making decisions on offshoring R&D activities – their governance and location strategies of

FDIs in China, thus offering fresh insights to managers and policy makers to better

understand how institutional framework conditions and their enforcements affect the inward

investment of R&D and the way it is governed and embedded in the system.

13

Declaration

No portion of the work referred to in the thesis has been submitted in support of an

application for another degree or qualification of this or any other university or other

institute of learning.

14

Copyright statement

i. Author of this thesis (including any appendices and/or schedules to this thesis)

owns certain copyright or related rights in it (the “Copyright”) and s/he has

given The University of Manchester certain rights to use such Copyright,

including for administrative purposes.

ii. Copies of this thesis, either in full or in extracts and whether in hard or

electronic copy, may be made only in accordance with the Copyright, Designs

and Patents Act 1988 (as amended) and regulations issued under it or, where

appropriate, in accordance with licensing agreements which the University has

from time to time. This page must form part of any such copies made.

iii. The ownership of certain Copyright, patents, designs, trademarks and other

intellectual property (the “Intellectual Property”) and any reproductions of

copyright works in the thesis, for example graphs and tables (“Reproductions”),

which may be described in this thesis, may not be owned by the author and may

be owned by third parties. Such Intellectual Property and Reproductions cannot

and must not be made available for use without the prior written permission of

the owner(s) of the relevant Intellectual Property and/or Reproductions.

iv. Further information on the conditions under which disclosure, publication and

commercialisation of this thesis, the Copyright and any Intellectual Property

and/or Reproductions described in it may take place is available in the

University IP Policy (see

http://documents.manchester.ac.uk/DocuInfo.aspx?DocID=24420), in any

relevant Thesis restriction declarations deposited in the University Library, The

University Library’s regulations (see

http://www.library.manchester.ac.uk/about/regulations/) and in The University’s

policy on Presentation of Theses.

15

Acknowledgement

First and foremost, I would like to thank my supervisors Prof Silvia Massini and Prof

Jakob Edler for your amazing support and friendship over the past years. Before

embarking on my PhD journey, I was a novice in this field, but with your help I have

grown immensely and have learned so much from you during this time. You have

always been there for me when I needed it, and I could not have done this without you.

For this I will always remain grateful.

I would also like to thank Prof Philippe Laredo and Dr John Rigby for your valuable

comments and suggestions for my research during the annual review meetings which

helped me to continuously adjust and refine this project. Sincere thanks are also

expressed to all the people at the MIoIR institute and other institutions at Alliance

Manchester Business school for their nice and friendly help with all kinds of issues, big

and small, throughout my time here. Special mentions to Prof Joseph Lampel, Dr

Yanchao Li, Prof Charles Cui, Prof Paul Irwing, Dr Jenny Rodriguez.

All the people at the PGR office must also be mentioned here for all your help on

various things over the years. Lynne Barlow-Cheetham, Stefan Johnson, Kristin

Trichler, Paul Greenham, and Madonna Fyne. You have all made my stay here in

Manchester so much better with excellent support and administration.

I am very grateful and appreciative to have received the Alliance Manchester Business

School Doctoral Studentship, and also wish to extend my thanks to all the participants

and organisers of 2018 R&D management conference, and the 2018 EIBA conference.

Last but not least I want to thank my incredible and wonderful friends and PhD

colleagues at the School who filled my life with fun during the hard work of my PhD,

Ping Sun, Yan Xu, Dhruba Borah, Xiuqin Li, Chanaka Ganepola, Haitong Li, Chao Li,

and Fengjie Pan, as well as my other friends who in their own ways have supported me.

Yingying Wu, Wen Liu, Xiao Xu, Zhou Zhou, and Shuo Peng are just some of the

people I want to acknowledge, with many others helping out on the way. My husband

Emil and family also deserve my unlimited appreciation and love. Thank you all for

everything you have done for me during these years.

16

Chapter 1 Introduction

1.1 Offshoring business services

The term offshoring is normally used to refer to the process of sourcing business

activities, processes, or functions overseas to serve the domestic market and global

operations (Manning, et al., 2008; Kenney, et al., 2009; Lewin, et al., 2009). Offshoring

is treated as a strategy of efficiency-seeking, (human) resource-seeking, or acquiring

access to foreign markets (Jensen & Pedersen, 2012). The overall purpose behind

offshoring activities is to improve or maintain profitability in highly competitive

industries (Dunn, et al., 2009). This is typically achieved by separating a value chain

into different processes and locating each one to the place where it can be accomplished

with the highest efficiency, or at the lowest cost (Schwörer, 2013).

Offshoring in a modern context dates back to the 1960s, where labour-intensive

manufacturing processes comprised the major part of offshoring activities for the

purpose of minimising costs (Frobel, et al., 1980). The characteristics of offshoring

activities transformed in the late 1980s and throughout the 1990s, where global

Research and Development (R&D) alliances experienced a remarkable increase,

especially in the biotechnology and information technology sectors (Belderbos, et al.,

2004). Since the late 1990s, companies from developed countries have also started to

source business processes to foreign countries to support their domestic and global

operations (Kenney, et al., 2009). By the 2000s, activities that are being offshored have

extended to include high value professional and business services (Manning, et al.,

2008; Stringfellow, et al., 2008), marking an evolution of offshoring from low to high

value activities. The consequence is that global sourcing of value-added activities has

become an increasingly important organisational option (Dossani & Kenney, 2006;

Nieto & Rodríguez, 2011), with some authors referring to offshoring of innovation

activities as “next-generation offshoring” (Lewin & Couto, 2007). The term offshoring

innovation activities in this thesis refers to locating business activities such as R&D,

product design, software applications, as well as basic and applied research overseas to

not only serve the local market, but also to contribute to firm’s global operations. An

increasing number of firms are now setting up wholly owned R&D centres in emerging

countries such as Russia, China and India, or undertake arms-length sub-contracting of

R&D in these countries. Furthermore, a wider range of industries has been seen to adopt

17

an R&D offshoring strategy than previously (Bardhan & Jaffee, 2005). Scholars

observed that this phenomenon started by larger leading companies, such as Motorola

and General Electric (Delios & Henisz, 2003), with small and medium sized firms

following by offshoring new product design jobs in increasing fashion later (Dossani &

Kenny, 2007). In addition, researchers also have found a shift of governance choices.

Lewin and Volberda (2011) stated that wholly-owned subsidiary was preferred over the

outsourcing by firms in early years, but this has changed over time, indicating that

companies’ preference has shifted in favour of outsourcing, regardless of nationality or

functions.

The choices of destinations for advanced activities offshoring have also evolved from

developed countries to developing countries (Massini & Lewin, 2012). Among all these

different offshoring destinations, it is argued that Asia is now playing a central role in

the growing global innovation networks (Ernst, 2006), and the emergence of new

science and engineering (S&E) clusters in Asian countries have attracted firms from

Western developed countries to offshore to those countries (Lewin, et al., 2009).

However, researchers noted that the majority of high-end product development and

engineering activities are still being carried out in the Western developed countries

(Manning, et al., 2008). The total amount of R&D performed outside home countries

remained comparatively small and less important for many companies (Birkinshaw,

2002), even though researchers claim that it would grow significantly over the coming

decade and become one of the key strategic issues on the agendas of firms with

international ambitions (Dossani & Kenny, 2007; Lewin, et al., 2009).

A.T. Kearney developed a ‘Global Services Location Index’1 (GSLI ), and have

identified the top attractive destinations for global service offshoring based on their

financial attractiveness, people skills and availability, and business environment in 2017

(Figure 1.1). Emerging economies, specifically China and India, have taken the leading

positions and remained the top destinations since 2004 (Gott & Sethi, 2017). Therefore,

it is important to analyse what factors affect firm’s offshoring decisions, especially to

offshore innovation activities to emerging countries.

1 Formerly known as “Offshore Location Attractiveness Index”.

18

Figure 1.1: 2017 A.T. Kearney Global Services Location Index - Top attractive

destinations for global service offshoring (Gott & Sethi, 2017).

Notes: The weight distribution for the three categories is 40.30.30. Financial

attractiveness is rated on a scale of 0 to 4, and the categories for people and skills

availability, and business environment are on a scale of 0-3.

Source: A.T. Kearney (2017), accessed via:

https://www.atkearney.com/documents/20152/793366/The+Widening+Impact+of+Auto

mation.pdf/42b06cf4-e5f9-d8ec-a30c-a82dd26d4953

However, emerging economies, many of which have great pools of talent and are seen

as attractive destinations for MNCs, often have weak intellectual protection (IP)

regimes. This represents a serious concern for foreign firms and serves as a deterrent for

offshoring innovation work (Bardhan & Jaffee, 2005), since firms will face the risk of

competitors stealing or infringing in other ways their intellectual property and

proprietary processes if they transfer processes or innovation activities offshore to

emerging markets (Aron & Singh, 2005). Therefore, it is essential to develop a deep

2.97

1.03

2.84

1.16

2.44

2.99

3.37

2.72

2.63

3.42

2.85

2.54

3.06

3.13

3.31

2.65

3.25

2.92

2.37

3.3

1.19

2.26

1.13

2.15

1.17

0.95

1.26

1.61

1.38

1.07

1.45

1.33

1.38

1.57

1.39

2.02

1.53

1.47

2.69

2.63

1.25

2.12

1.49

2.14

1.87

1.61

0.99

1.35

1.68

1.22

1.43

1.88

1.43

1.17

1.22

1.27

1.2

1.72

1.26

1.14

5.41

5.41

5.46

5.45

5.48

5.55

5.62

5.68

5.69

5.71

5.73

5.75

5.87

5.87

5.92

5.94

5.98

6.11

6.32

7.07

P E R U

U N I T E D K I N G D O M

R O M A N I A

G E R M A N Y

C Z E C H R E P U B L I C

B U L G A R I A

E G Y P T

M E X I C O

P O L A N D

S R I L A N K A

C O L O M B I A

C H I L E

T H A I L A N D

P H I L I P P I N E

V I E T N A M

B R A Z I L

I N D O N E S I A

M A L A Y S I A

C H I N A

I N D I A

Financial attractiveness People skills and availability Business environment

19

understanding of the institutional environments of the emerging countries foreign

MNCs choose to offshore R&D to, especially those related to IP and business laws.

1.2 Factors behind offshoring decisions

For the past two decades, Transaction Cost Economics (TCE) has dominated the

literature on the determinants of firm boundaries (Argyres & Zenger, 2012), and has

proved as an insightful theory for studying global sourcing transactions (Schneider, et

al., 2013). From the TCE perspective, most studies on offshoring have focused on the

direct economic benefits that derive from it (Monczka, et al., 2005; Grossman & Rossi-

Hansberg, 2008; Mudambi & Venzin, 2010) as offshoring can offer increased

competitiveness by a reduction of costs (Cadarso Vecina, et al., 2012). With regard to

innovation offshoring, the wage advantage is also cited as an important determinant

behind offshore location choices (Lewin & Peeters, 2006), and countries which provide

labour arbitrage in terms of R&D wages will be attractive offshore locations for R&D

projects (Demirbag & Glaister, 2010). However, this view is challenged by researchers

who argue that most of the US services actually had been offshored to other developed

countries (Trefler, et al., 2005). Although cost factors may determine the initial decision

to offshore, they do not necessarily affect subsequent evolution towards offshoring of

more advanced activities (Maskell, et al., 2007). Companies frequently evolve from

seeking cost reductions to knowledge-seeking objectives.

Along TCE, the Resource Based View (RBV) (Barney, 1991; Penrose, 1959) of the

firm has become increasingly important in strategic management (Wu, 2010), as well as

in the decisions of the firms’ boundaries since it contends that the reasons for

internalisation extend beyond the cost of transacting through the market to the

conditions that enable firms to establish, maintain, and use capabilities more efficiently

than markets can do (Teece, et al., 1997). It is consistent with the argument that

financial implications are no longer the only driver, and that other driving forces, such

as utilising service providers’ expertise or capabilities and service providers' flexibility

(Trefler, et al., 2005), are becoming increasingly important (Roza, et al., 2011). In other

words, offshoring firms do not only try to cut costs, but also try to create value through

strategic sourcing of knowledge-intensive activities, such as R&D, product design, and

engineering services and that offshoring decisions are driven by more strategic reasons,

such as accessing higher-level human capital, building organisational flexibility,

20

increasing local absorptive capacity, sourcing of innovation, accessing talent with

specialised capabilities around the world (which directly relates to the decline in young

adults selecting S&E careers in Western countries), as well as market seeking (Lewin, et

al., 2009; Massini & Lewin, 2012). Among the factors mentioned above, it is becoming

clear that accessing pools of highly skilled talent around the world has emerged as a

new key strategic driver, especially for offshoring innovation activities (Manning, et al.,

2008; Bunyaratavej, et al., 2007). Besides obtaining access to talent pools, researchers

have also made the argument that offshoring enables MNCs to access knowledge in

varied markets and benefit from increased diversity and heterogeneity in their

knowledge bases, which may arise as a result of complementary technologies in the

offshore site (Nieto & Rodríguez, 2011). Therefore, firms can improve their own

abilities to combine knowledge for innovation (D’Agostino, et al., 2013). It is argued

that offshoring R&D activities to countries with more specialised knowledge provides

firms with location-specific resourcing and specialisation advantages, and therefore,

firms can obtain better innovation inputs, greater flexibility, and thus enhanced

innovation capabilities (Nieto & Rodríguez, 2011). Furthermore, obtaining access to the

experience of varied academic and educational institutions, as well as innovative

environments, has the potential to support the growth of individually distinct scientific

and technological cultures, which in turn may spur innovation along radically different

lines and finally enrich the global economic welfare (Bardhan, 2006).

At the same time, since organisations are operating within a given context, they need to

conform to the dictates of the institutional environment if they want to gain success and

survival (Scott, 2008). This is mainly because if strategies do not conform to the

institutional norms of the host market, they may not be viewed as legitimate (Kostova &

Zaheer, 1999). In addition, if firms intend to expand abroad successfully, they need to

balance the benefits of resource-based advantage exploitation with the costs of not being

isomorphic with the host market institutional environment (Brouthers, et al., 2008).

Besides, being familiar with the location and its particular institutional context can bring

benefits and advantages to firms (Madhok, 2002). Therefore, the institutional

environment can affect which market the MNCs would like to enter, as well as the

governance choices (Brouthers, 2002). Scott (1995) and North (1990) maintained that a

country’s specific institutional environment is made up of a formal regulatory

dimension, which includes governmental or political actions (often referred to as

country risk) and legal regulations, and an informal dimension—its social norms. These

21

different dimensions generate both opportunities and barriers to business activity.

Therefore, from the Institutional theory’s perspective, offshoring decisions are not only

affected by cost and resources seeking/complementing factors, but also greatly affected

by the institutional environment.

With regard to the informal dimension of a country’s institutional environment, cultural

differences between host and home country can also affect companies’ offshoring

decisions, as cultural differences can increase the complexity of transferring functions

abroad (Hutzschenreuter, et al., 2011). Therefore, additional costs for training and

acquiring information may be required (Bunyaratavej, et al., 2007). Some scholars have

analysed in more detail the influence that culture poses, and conclude that cultural

influences could have greater impact in the early stages of offshoring (Massini &

Lewin, 2012). It is also argued that firms are more likely to respond to internal

uncertainties resulting from geographic and cultural distance by leveraging the internal

controls and collaboration mechanisms of a captive offshore service centre (Gooris &

Peeters, 2014; Hutzschenreuter, et al., 2011). In addition, language barrier, which is

another form of cultural difference, may pose an obstacle to the delivery of key

component of services and increase the complexity of communication, as well as

management (Bunyaratavej, et al., 2007; Doh, et al., 2009).

Regarding the formal regulatory dimension, firms that are seeking protection for

technology transferred across national borders face a complex variety of legal rules and

procedures (Oxley, 1999). Therefore, the legal system in host country is an important

factor that firms need to consider when they are making offshoring decisions (Javalgi, et

al., 2009), especially the intellectual property rights (IPR) regime when offshoring

strategic important innovation activities (Bardhan & Jaffee, 2005; Oxley, 1999).

Scholars argue that in some industries, such as the pharmaceutical industry, the

importance of IPR is higher than in others (Bardhan & Jaffee, 2005). Indeed, Oxley

(1999) recognised that firms were reluctant to transfer advanced technology to unrelated

third parties (e.g. a licensee) in countries with weak IPR regimes.

The discussion above has unpacked the reasons behind the importance of institutional

factors to MNC’s decisions of offshoring innovation activities, especially the influences

of IPR (Gonzalez, et al., 2006; Rebernik & Bradac, 2006; Dunning, 1988; Dunning,

1980; Gammeltoft, 2006; Kinkel, et al., 2007). However, we also note that very few

studies have comprehensively researched the effect of IPR and other institutional factors

22

on offshoring decisions. In this thesis, we are aiming to find answers to the Research

Question (RQ):

RQ: Do institutional factors influence the offshoring innovation activities? And

specifically, what is the role of IPR in offshoring of innovation?

The rest of the thesis is organised in the following order to address this research

question: Chapter 2 provides an overview of offshoring of business services in the

selected country and introduces the three research papers, the underlying rationale for

those studies and the specific sub-research questions, how they contribute collectively,

and adopting different methodologies to address the research question above. Chapter 3

presents Paper 1, which analyses the evolution of Chinese IP system. Studies have

shown that governance and location choices are interrelated (Contractor, et al., 2010),

but in order to develop a deeper understanding of the role that the institutional

environment plays in offshoring innovation activities, we analyse the influences

institutional factors have on offshore governance choices, and the effect of institutions

on location strategies in Chapters 4 and 5, which present Paper 2 and Paper 3,

respectively. Chapter 6 concludes the thesis with a discussion on the overall findings of

the thesis and how they addressed the main research question, its contribution and

implications, as well as the limitations of this research and future research directions.

23

Chapter 2 Positioning and overview of the three research

papers

In order to develop a deeper understanding of the role of institutional factors (especially

IPR) on MNCs offshoring their innovation activities, we address this issue in three

separate but inter-related papers. Due to our interest in the role of IPR on offshoring of

innovation activities, it is important to focus the study on a country where the IP regime

has undergone substantial changes over time. Therefore, this PhD thesis starts with

analysing the evolution of the Chinese IP system, with the aim to acquire a thorough

understanding of the Chinese IPR regime. Second, since the chosen governance mode is

considered to be a significant determinant of the overall success of foreign activities

(Chen & Hu, 2002), we test the relationships between institutional factors and

offshoring governance modes. Third, we focus specifically on firms that have

established R&D centres in China (captive operations) to analyse the evolution of their

location strategies, and further test the relationships between institutional factors and the

choice of location strategies.

2.1 Why China?

Two of the three papers in this PhD thesis focus on China. The rationale behind this

choice is that the change of IPR over time allows us to see how different IPR settings

affect offshoring behaviour, and that China is an ever increasingly popular destination

for offshoring R&D activities. Despite China having undergone a drastic improvement

in the IPR law and IP enforcement over the last 35 years, the IPR protection regime in

China is a major concern for firms and governments (e.g., United States, European

Union). We also note that multinational companies have followed different approaches

towards offshoring of high value activities to China over the past years. For example, in

2014 Adobe shut down its Chinese R&D centre, established just nine years ago,

blaming hostile government and software piracy in China as the main reason, as well as

wage inflation (Carsten, 2014). However, Apple and Ford continue to aggressively

expand their innovation activities in China (Murphy, 2014; Dou, 2014). These opposing

strategies make China an interesting setting to study, especially in the context of why

MNCs choose China as a destination where to conduct R&D.

24

Figures 2.1 and 2.2 present the Gross Domestic Product (GDP) and GDP per capita of

BRIC countries (Brazil, Russia, India, China), the United Kingdom (UK), and the

United States (US) from 1995 to 2017. It can be observed that China has become the

second largest economy in terms of GDP among these six countries since 1999.

However, the GDP per capita of China is only slightly higher than in other developing

countries, such as India, due to its large population, although it also keeps increasing.

Figure 2.1: GDP (constant 2010 billion US$) of China, Brazil, India, Russia, UK, and

US from 1995 to 2017.

Source: The World Bank database, accessed via: https://data.worldbank.org/

Figure 2.2: GDP per capita (constant 2010 US$) of China, Brazil, India, Russia, UK,

and US from 1995 to 2017.

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Previous studies have claimed that the availability of talent and cheaper labour cost in

China has made it a very attractive destination for offshoring business services activities

(Kedia & Mukherjee, 2009; Li & Kozhikode, 2009; Roza, et al., 2011). As shown in

Figure 2.3, the enrolment in tertiary education in emerging economies during 1995-

2016 increased notably, especially in China and India, while the enrolment in developed

economies (such as US and UK) remained at a similar level or even decreased.

Figure 2.3: Enrolment in tertiary education (all programmes2) from 1995-2016.

Source: UNESCO database, accessed via:

http://data.uis.unesco.org/Index.aspx?DataSetCode=EDULIT_DS

Figure 2.4 presents the amount of foreign direct investment (FDI) net inflows into

Brazil, Russia, India, China, UK, and US from 1990 to 2017. While the US attracts

almost the majority of FDI during the whole period, China is the leading country among

of the BRIC countries. The graph shows that the first notable increase of FDI inflows in

China occurs in 1993, one year after the “China-US: Memorandum of Understanding on

The Protection of Intellectual Property” reached an agreement, and the first Patent law

amendment was published. The second notable increase occurs in 2001 when China

2 According to the International Standard Classification of Education 2011 (ISCED 2011), “all

programmes” refers to: Short-cycle tertiary education, Bachelor or equivalent, Master or equivalent, and

Doctoral or equivalent.

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26

became a member of the World Trade Organisation (WTO), and the FDI net inflows in

China increased dramatically. A Financial Times report shows that between January

2010 and December 2014, China has attracted 88 greenfield R&D projects from foreign

firms, for a total 5.5 billion USD capital investment, revealing that China has caught up

with the US in attracting foreign investment in R&D (Fingar, 2015).

Figure 2.4: FDI net inflows (BoP, current million US$) of China, Brazil, India, Russia,

UK, and US from 1990 to 2017.


Previous studies have stated that deficiencies still exist in the Chinese IP system, and

the IP infringement in China is still at a relatively high level (Cao, 2014). For example,

the United States filed a complaint regarding the IPR protection in China to the WTO

on 10 April 2007 where it raised the issue of four aspects of the Chinese IP laws and

custom measures being inconsistent with the TRIPS agreement, and urged China to

improve its IP system (WTO, 2010). Because of this, MNCs may stop offshoring

important R&D unless special contingencies are adopted by them (Quan & Chesbrough,

2010). On the other hand, some researchers claim that the quality of IPR protection in

China is improving (Awokuse & Yin, 2010). Since China joined the WTO at the end of

2001, the IP laws in China have been revised more than once, and the government has

repeatedly emphasised the importance of improving the Chinese IP system and their

plans regarding how to improve it. According to the World Economic Forum (WEF)

annual Executive Opinion Survey, the position of China in the IPR protection ranking

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was 49th among 140 countries in 2018, while its position was 48th among 59 countries in

1999 (WEF, 2018). In addition, the Ginarte-Park index that measures the IPR protection

strength of a country, reveals that the score of China increased from 1.33 before 1990 to

4.08 in 2005 (Park, 2008; Ginarte & Park, 1997). All these factors indicate that the

Chinese IP system is improving, although distance still exists between China and

developed countries in terms of IP enforcement.

In summary, the trends and figures above show that the Chinese economy and

enrolment in tertiary education are consistently increasing, and the market size and the

availability of talent make China a popular destination for attracting FDI. This includes

FDI in R&D, an area which is sensitive and dependent on the IPR protection in host

countries (Oxley, 1999). Although different IPR index or survey scores suggest that the

IPR regime in China is improving, some researchers and foreign governments argue that

the IPR protection in China is still rather weak, and that MNCs should be cautious when

locating R&D activities in China. Nevertheless, due to China’s attractiveness of foreign

innovative activities and its debatable IPR regime, it is important to develop a deep

understanding of the Chinese IPR regime, how it has evolved, and how MNCs manage

their R&D activities in China.

The following three sections outline how the three research papers contribute to this

research agenda. These are followed by a concluding section which brings them

together to address the main research question of the thesis, that is the role of

institutional factors, and especially IPR, on the offshoring of innovation activities.

2.2 Paper 1: The evolution of the Chinese IPR system: Phases of change and

impact on innovation activities

The IPR protection regime in China has been studied by many scholars, however, we

note that Chinese IPR protection regime is still a debatable topic among scholars even

in recent research. One group of researchers claim that IPR protection in China has

undergone remarkable development, and that accessing the TRIPS agreement has

brought a “structural breakpoint impact” on Chinese IP protection system (Li & Yu,

2015), as China realised the importance of protecting IP and treated IP as an important

asset (Li & Yu, 2015; Nguyen, 2010). Given the numerous changes made in the

relatively short history of the Chinese IP system, researchers claim that IPR protection

28

in China will become even better as China starts to develop its own intellectual property

(Swike, et al., 2008) and because the Chinese economy and technology are developing

rapidly (Peng, 2013; Peng, et al., 2017). On the other hand, another group of researchers

argue that several defects remain in the Chinese IP system, which include authority

overlapping3 and IP protection enforcement inconsistency among central government,

local governments and individual ministries (Brander, et al., 2017), and too low fines

and penalties for IPR violations to prevent infringements from happening (Cox &

Sepetys, 2009). In order to have a comprehensive understanding of the Chinese IP

system, the first research paper aims to answer the following research question:

RQ1: How has the IP legislation in China evolved? How has the IP enforcement in

China changed? Finally, what further changes to the IP activities in China have been

accomplished?

Different from previous studies which analysed the IPR protection in China mostly

based on previous economic and business research, news, government reports (e.g., US

government statements), or discussed from a cultural perspective, we investigate the

Chinese IPR regime from both written law and law in practice aspects. First, building

on Ginarte and Park’s work (1997), we develop a novel five-dimensional assessment

framework (the scope of protection, the duration of protection and clarity of procedural

provisions, enforcement mechanisms, protection strength of IPR, and the restrictions on

IPR) to analyse the provisions of each IP law (Patent law, Trademark law, and

Copyright law) and their amendments. We conclude that Chinese IP laws have been

improved in a systematic way in 2000, which established a solid foundation for the

future development of Chinese IP legislations. Second, secondary data published by the

State Intellectual Property Office have been gathered to analyse the IP law enforcement

in China. The number of cases handled by administrative departments and the courts

suggest that the IP enforcement in China has been strengthening only from 2008, which

suggests that the IP enforcement in China was weak before 2008 but is improving

gradually since then. This explains past studies arguing that the IPR protection in China

is weak, especially its enforcement (Hu & Jefferson, 2009; Greguras, 2007; Liu, 2005).

3 Authority overlapping indicates central government, local governments and individual ministries can

claim authority on a subject in the same area.

29

Finally, we analyse the trends of patent applications and granting, and trademark

registrations in China during the period of 1980s to 2016. The results suggest

coevolution of the innovation activities in China and Chinese IP system. They show that

both IP laws and IP enforcement in China are improving, and that joining WTO has

provided a solid foundation for China to improve its IP system. Our findings enhance

knowledge and understanding of the IP development in China, which could help MNCs

to decide which specific strategies they could adopt in accordance to the IPR regime

when offshoring innovation activities to China.

2.3 Paper 2: The influence of the institutional environment in host countries

on offshore governance choice and business outcomes

The role of the institutional environment of a host country on MNCs’ decisions to

offshore innovation has been recognised (e.g., Brouthers, et al., 2008; Madhok, 2002),

however, it remains under-investigated empirically. Research on firms’

internationalisation, has shown that governance modes, i.e., fully owned, hierarchical

solutions or more arm length outsourcing contracts, are very important strategic

decisions, as they affect MNCs’ performance and achievable savings (Lu, 2002), with

different governance modes offering specific benefits and risks (Hutzschenreuter, et al.,

2011; Elia, et al., 2014). Therefore, in the second research paper we focus on analysing

the relationship between institutional factors and offshore governance modes (captive4

and offshore outsourcing5).

Previous studies anchored on TCE and the RBV of the firm, suggest that cost reduction

(such as labour arbitrage, reducing fixed investments) and accessing valuable resources

(such as high-level human capital, sourcing of innovation) affect a firm’s governance

choices (Lewin, et al., 2009; Massini & Lewin, 2012; Youngdahl & Ramaswamy, 2008;

Kotabe & Murray, 2004). However, as Williamson suggests when discussing

governance choices, “the institutions of governance (firms, markets, hybrids, bureaus)

are embedded in the institutional environment" (Williamson, 1992), thus recommending

that the institutional environment of countries should also be taken into consideration.

Previous studies have shown that when MNCs expand their operations globally, the

4 Captive mode means establishing a wholly owned subsidiary abroad. 5 Offshore outsourcing here refers to contracting out a function or process to a third-party supplier in a

foreign country.

30

process of internationalisation and subsequent foreign operations may be severely

affected by the legal system in the relevant host country (Flores & Aguilera, 2007;

Gooris & Peeters, 2016). Some scholars have stated that firms often adopt captive mode

in countries with weak legal systems (Kshetri, 2007). The IPR protection of host

country is especially important when innovation activities are offshored. Oxley (1999)

points out that a hierarchical governance mode is preferred when the IPR protection in

the host country is weak, since offshore outsourcing can increase the risk of IP leakage,

which can erode firm’s competitive advantages (Hutzschenreuter, et al., 2011).

We note that although the central nature institutional factors have on offshore

governance choices has been recognised in previous research (Flores & Aguilera, 2007;

Javalgi, et al., 2009; Oxley, 1999; Hutzschenreuter, et al., 2011), very few studies have

comprehensively analysed their effect on governance choices and how these may be

mitigated. It also remains unclear whether the quality of rule of law and the IPR regime

in host countries affects a firm’s choice in this regard. Previous studies argue that

offshoring can achieve certain business outcomes, such as access to qualified personnel,

improve firm’s competencies, etc. However, whether the institutional factors have an

effect on offshoring outcomes also remains obscure. Furthermore, studies have shown

that it is the alignment between firm’s governance choice and the governance mode

recommended by theories normally used to study governance choices (e.g., TCE, RBV,

etc.) that impact on firm performance (Brouthers, 2002; Shavers, 1998). However, those

studies are not specifically focused on offshoring innovation activities for which firm’s

knowledge is particularly important. To summarise, the research questions of the second

paper are the following:

RQ2.1: Do institutions such as rule of law and IPR regime in host countries affect a

firm’s offshore governance choices when offshoring innovation activities?

RQ2.2: Do governance misalignment and institutions affect achieving business

outcomes when offshoring innovation activities?

The data used in this paper are derived from the Offshoring Research Network (ORN)

database, which comprises international and longitudinal surveys (conducted in 2007,

2009, and 2011) among companies and is focussed on surveying offshore project

implementations, which is the unit of analysis. Among all the 13 functions firms

31

offshored, we select product design, research and development, software development,

and engineering services to represent innovation functions. For the regression analysis,

we supplement the ORN data with data on institutional factors (IPR and rule of law)

from the United States Trade Representative’s Special 301 report and the International

Property Rights Index (IPRI) as developed by Property Rights Alliance. We adopt a

Heckman-based approach and first test the relationships between institutional factors

and the offshore governance choices, and then we analyse the effect of institutional

factors and governance misalignment on the achievement of offshoring outcomes. The

regression results show that rule of law in host countries has a positive effect on the

probability of choosing captive mode, while IPR protection is negatively related to such

choice. Regarding business outcomes from offshoring, the findings of this paper show

that firms that fail to adopt offshore outsourcing mode are less likely to focus on core

competencies, access to qualified personnel, improve organisational flexibility and

firm’s overall competitiveness, but are more likely to gain access to new markets.

Regarding firms that fail to adopt captive mode, they are more likely to improve

organisational flexibility, firm’s overall competitiveness, and productivity/efficiency.

We find that institutions in host countries do affect achieving certain offshore outcomes,

specifically, the rule of law in host countries was found to be positively related to

focusing on core competencies, but negatively related to increasing firm’s overall

competitiveness, service quality, accessing to new markets, and breakthrough process

improvement(s). Furthermore, the results also show that the IPR protection strength is

negatively related to focusing on core competencies, and accessing qualified personnel.

Our findings first suggest that host countries could strengthen their institutional

environment, in particular, the rule of law and IPR protection, so that MNCs will be

more committed to the country respectively by establishing wholly-owned subsidiaries,

or it will be more willing to outsource innovation activities to local suppliers. Second,

they can provide guidance to decision makers in firms regarding what needs to be

considered when deciding governance choices.

2.4 Paper 3: Why do multinational firms locate R&D to China? An analysis

of the determinants of location strategies

From the previous two papers, we learn that the IP laws and enforcement in China are

improving making an increasingly attractive offshoring destination for innovation, and

32

that IP activities and IP system development in China are seemingly coevolving. We

also find that institutional factors affect offshore governance choices and the probability

of achieving business outcomes from offshore by using the survey data. However, it is

not clear how the MNCs manage R&D activities offshored to China. Previous studies

suggest that captive mode increases the opportunities for market development in the

long run and could mitigate the risks caused by weak institutions (Kshetri, 2007;

Caniato, et al., 2015), but whether having a wholly-owned R&D centre in China means

that important technologies are actually offshored there remains unknown. Therefore,

whether the improvement of IPR regime could strengthen MNCs’ confidence of

locating strategically important technologies to China also needs to be thoroughly

analysed. In this paper, we analyse location strategies adopted by MNCs which

established R&D centres in China from two knowledge-intensive industries that have

different characteristics, pharmaceuticals and computer and electronics industries.

Home-base-exploiting (HBE) and home-base-augmenting (HBA) are the two main

motives developed by Kuemmerle (1999). When sufficient science and technology

resources are present in developed economies, the R&D sites offshored to these

countries are more likely to be driven by HBA motives, while R&D activities offshored

to countries with a relative attractive market or developing economies are more focused

on product commercialisation and adaption (HBE) (Liu & Chen, 2012; Kuemmerle,

1999). However, researchers have shown that these strategies may be changing over

time, for example, R&D activities conducted in China were initially focused on HBE,

but gradually involved HBA and HBE strategies simultaneously (Bruche, 2009; Ernst,

2006).

Using the revealed technology advantage (RTA) index of firm’s home country and host

country, Patel and Vega (1999) further categorised the drivers of MNCs to establish

R&D overseas into 4 different types of location strategies for R&D: Technology

Seeking (TS), Market Seeking (MS), HBA, and HBE. Studies have shown that HBA

and HBE are the two main motives that drive MNCs to establish R&D centres overseas

(Patel & Vega, 1999; Le Bas & Sierra, 2002).

Previous studies have two limitations. First, they only focused on identifying the

dominant location strategies during a short period, and second, it remains under-

investigated whether the location strategies adopted by MNCs are affected by

33

institutional factors in the host country. The research questions of this paper which

focus on R&D location strategies in China are the following:

RQ3.1: What are the R&D location strategies of MNCs in China? And how have they

evolved?

RQ3.2: What factors affect the choice of different location strategies by MNCs in

China?

We have selected the 79 top performing multinational firms by sales revenue that have

established wholly owned labs in China from the pharmaceutical and computer and

electronics industries. By using the patent data extracted from worldwide Patent

Statistical Database (PATSTAT), we build and compare the RTA indexes of firm’s

home and host countries, and calculate the share of each strategy adopted by a firm in a

given year. We find that locating R&D activities to China are motivated by exploring

the technology areas where China has an advantage, while the importance of market

seeking and technology exploiting (in technology fields in which China does not have

relative specialisation) increases gradually over time, especially for computer and

electronics firms. We also find that institutional factors (i.e. IPR protection strength of

home and host countries, quality of rule of law, and institutional distance) play a role on

specific MNC’s strategies for offshoring R&D activities to China. In particular, the

results show that the IPR protection strength of China is positively related to the share

of both market seeking and technology exploiting strategies, which suggest that when

firms are planning to conduct R&D activities in areas in which China is not specialised,

they are more likely to offshore such activities if the IPR protection regime in China is

stronger. Our findings strengthen our understanding of MNC’s strategies of conducting

R&D in China, and extend previous works by testing the effect of institutional factors

on the choices of location strategies.

2.5 The Overall Research Framework of the Thesis

The three sections above introduced the sub-research questions of each paper, and how

they are inter-related. These three research papers studied the evolution of Chinese IP

system comprehensively, tested the relationships between institutional factors

34

(especially IPR) and offshore governance choices, and analysed the evolution of

location strategies MNCs adopted in China, as well as the effect institutional factor

(especially IPR) on choices of location strategies. The sub-research questions we

addressed in each paper contribute to the understanding of the main research question

“Do institutional factors influence the offshoring innovation activities? And

specifically, what is the role of IPR for offshoring of innovation?”. The multiple data

sources (e.g., Chinese laws, government reports, survey data, patent data) and different

methodologies (qualitative and quantitative research methods) adopted in each paper

complement each other, which also reinforce the fact that the three papers help

answering the main research question jointly and coherently. The contributions of the

three research papers and their connections are represented visually in Figure 2.5. The

following three Chapters: Chapter 3, Chapter 4 and Chapter 5 present the three research

papers of this thesis.

Figure 2.5: Positioning of the three papers

RQ: Do institutional factors influence the offshoring innovation activities? And specifically, what is the role of IPR in offshoring of innovation?

Paper 1: The evolution of the Chinese IPR system: Phases of change and impact on innovation activities

RQ1: How has the IP legislation in China evolved? How has the IP enforcement in China changed? Finally, what further changes to the IP activities in China have been accomplished?

Data source: Chinese IP laws, government reports

Research method: Qualitative research

Paper 2: The influence of the institutional environment in host countries on offshore governance choice and business outcomes

RQ2.1: Do institutions such as rule of law and IPR regime in host countries affect a firm’s offshore governance choices when offshoring innovation activities?

RQ2.2: Do governance misalignment and institutions affect achieving business outcomes when offshoring innovation activities?

Data source: Survey data (ORN), United States Trade Representative’s Special 301 report, WGI

Research method: Quantitative research (Heckman-based approach )

Paper 3: Why do multinational firms locate R&D to China? An analysis of the determinants of location strategies

RQ3.1: What are the R&D location strategies of MNCs in China? And how have they evolved?

RQ3.2: What factors affect the choice of different location strategies by MNCs in China?

Data source: Patent data (PASTAT), Datastream, Compustat, United States Trade Representative’s Special 301 report, WGI

Research method: Quantitative research (Fixed effects regression)

35

Chapter 3: The evolution of the Chinese IPR system: Phases

of change and impact on innovation activities

Abstract

Since the 1980s, the Chinese IPR system has undergone significant changes in both the

design of the legislation and its enforcement. The IP laws in China have been revised

three times since the first IP law was enacted in 1982. In this paper we aim to develop a

deeper understanding of how the IP legislations and enforcement in China have

evolved, and shed more light on the impact of these changes on the nature and extent of

IP activities in China by analysing the changes introduced in each revision, as well as

their impact on the trends of patents and trademarks applied/registered and granted

during this period. Our results show that IP laws and their enforcement have been

greatly enhanced, especially since 2000. We also show that IP activities follow a similar

development pattern to the IP laws development in China, with the number of patent

and trademark applications and grants/registrations showing a very modest increase

until 2000, but then a remarkable increase began, which further increased after 2008.

3.1 Introduction

In 1978, an “open-door” policy was adopted in China, which gradually transformed the

planned economy system operating in China for 30 years into a market economy

system. In order to support this economic system transformation, China also joined a

series of intellectual property rights (IPR) protection international conventions/treaties,

and established its own legal system to protect IPR. China signed the WIPO convention

in 1980, and on 11th December 2001, China was accepted as a member of the World

Trade Organization (WTO). As a compulsory requirement for becoming a member of

the WTO, China had to improve its IP system to comply with the minimum standards of

the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (Li &

Yu, 2015; Keupp, et al., 2009). Patent law, Trademark law, and Copyright law were all

revised, and several other IP related laws and regulations were also issued during this

period. It is stated that improvements made this time made the Chinese IP laws in

36

compliance with the TRIPS agreement, as well as meeting international standards in

other respects as well (Wang, 2004; Gao, 2008).

The IP laws in China have not remained unchanged over the last three decades. They

have been revised 3 times, and the Chinese IP regimes have been developed for over 35

years since the first IP law was enacted, however, the quality of IPR protection in China

is still a debatable topic. One group of scholars posit that after years of development and

law revisions, the IPR protection in China has been greatly improved and that such

differences between China and other developed economies will be narrowed down

(Wang, 2004). Barren and Wrathall (2006) stated that “China’s road to protecting IPR is

actually quite impressive given its rudimentary legal environment”.

The development of the Chinese IP system has been strongly affected by the WTO and

TRIPS agreement (Papageorgiadis & McDonald, 2018). Gao (2008) observed that the

numerous efforts that were made to improve the IPR protection in China during 2001,

when China joined WTO, have resulted in great progress regarding building up a

“modern, transparent, and effective” IP system, which not only meets the requirements

of TRIPS agreement, but also helps China to integrate into global economy. Peng and

colleagues (2017) argue that at the early stage of economic development, most countries

will choose to not enforce a high standard and strict IP protection.

However, a group of researchers hold opposite opinions regarding the IP protection in

China, and argue that although China has established IP laws that generally meet

international standards (Greguras, 2007), weak enforcement of IPR in China still

remains one of the biggest deficiencies in its IP system (Hu & Jefferson, 2009;

Greguras, 2007; Cao, 2014; Liu, 2005). Some researchers argue that IP infringement in

China is still at a relatively high level (Cao, 2014), and that the current Chinese IP laws

are complex and confusing since IP rights are governed by several separate legal

regimes (Wang, 2004).

After reviewing relevant streams of literature, we conclude that their statements

regarding IPR protection in China are mostly based on previous economic and business

research, news, government reports (e.g., US government statements), or discussed

from a cultural perspective. Few studies have thoroughly reviewed how the IP laws in

China have been revised, which could be one of the reasons for the opposite conclusions

on the current and future state of IPR in China reported in previous studies.

37

Furthermore, few studies reviewed how the IP activities in China have evolved while

the IP system in China is under development. Therefore, in this paper, we will analyse

in more detail how the IP legislations in China have evolved, and how the IP

enforcement in China changed, as well as what changes to the IP activities in China

have accomplished.

In this paper, we discuss the varied aspects that have been changed in each law revision

in detail based on the later three waves of change. In 2000, IP laws were changed in a

systematic and tremendous way, which also established a robust foundation for the

future development of Chinese IP legislations. The revisions provided after 2008 are

believed to be for China’s own goal of improving its innovation ability by enhancing

the level of IP protection (Li & Yu, 2015; Yang & Yen, 2009), and solving the

problems that exist when practicing IP laws after the second wave of revisions. By

analysing the revisions of patent law and trademark law, it can be noted that all five

aspects listed have been further improved, and we trust that this wave of change can

increase the IPR protection in China to a higher level.

After reviewing the evolution of Chinese IP laws, we analyse the IP enforcement in

China, the data does not show the same development pattern, but we note that while the

number of cases handled by administrative departments and the courts has remained at

comparative low level during the period of 2004 to 2008, all show substantial increase

after 2008. The data shows that IP enforcement in China is strengthening, although it

only started recently. With regard to the IP activities, we analyse the trends of patent

applications and granting, and trademark registrations in China during the period of

1980s to 2016. We note that the changes of all these aspects show a similar pattern of

the development of Chinese IP laws. Our findings contribute to existing literature and

enhance our understanding of the IP development in China, and its impact on domestic

and foreign innovation activities.

This paper is organised by starting with a general introduction on the IP systems in

China in section 3.2. In section 3.3, we introduce how the legislative system works in

China, provide an overview of evolutionary changes in the Chinese IP system, and then

review what changes have been brought in each wave of IP law revisions. We analyse

how the IP enforcement evolved, and how the patent application and granting,

trademark registration developed in China in section 3.4. In section 3.5 we then discuss

the main findings and conclude the paper.

38

3.2 The IP systems in China

The IP system in China is based on three fundamental aspects: legislative guidance,

administrative control and judicial enforcement (Yang, 2003). China was operating as a

planned economy system for 30 years since the establishment of the People’s Republic

of China (PRC), which resulted in protection of IPR as mainly relying on the

administrative regulations. It is only after the “open-door” policy adopted in 1978, and

that the planned economy system in China gradually started its transformation into a

market economy system, a legal system to protect IPR gradually was established and

improved since then (Wu, 2009). Therefore, in the practice of IPR protection, a “dual-

track” system comprising both administrative and judicial protection has been formed in

China, and both tracks operate in parallel. Scholars have stated that the joint efforts

made by administrative departments and the judicial organs lead to more comprehensive

protection for IPR in China (Liu, 2005). In this section, the administrative protection

route and judicial protection route will be introduced.

3.2.1 Administrative track

The Administrative body in China has the authority to supervise the implementation of

laws, as well as settle disputes administratively (Yang & Clarke, 2005). This includes

IP-related disputes, and the administrative body also handles the application,

examination, and approval of national patents (Yang, 2003). The State Intellectual

Property Office (SIPO) is the administrative authority that has the responsibility of

handling China’s overall patent work of comprehensively coordinating foreign-related

IPR affairs (SIPO, 2002), which include the Patent office, the Patent Re-examination

Board within patent office, and other directly affiliated units of SIPO. The trademark

registration and administration are handled by the Trademark Office, while the

Trademark Review and Adjudication Board is responsible for handling trademark

disputes. Both administrative authorities belong to the State Administration for Industry

and Commerce (SAIC) (SAIC, 2009). Copyright related matters, are mainly managed

by the National Copyright Administration of PRC (NCAC), and the Copyright

Protection Centre of China (CPCC, a subsidiary of NCAC) which is mainly responsible

39

for copyrights registration (NCAC, 2017; CPCC, 2017). More detailed responsibilities

of each IP related administrative authorities are shown in Figure 3.1.

40

Figure 3.1: The main responsibilities of the major administrative bodies involved in IP activities. Sources: Bosworth, D. & Yang, D., 2000. Intellectual property law, technology flow and licensing opportunities in the People's Republic of China. International Business Review, 9(4), pp. 453-477.

SIPO, 2018. State Intellectual Property Office of the PRC [Online] Available at: http://english.cnipa.gov.cn/; SAIC, 2018. State Administration for Industry &

Commerce of the PRC [Online] Available at: http://home.saic.gov.cn/english/aboutus/Departments/index.html; NCA, 2018. National Copyright Administration of

the PRC [Online] Available at: http://www.ncac.gov.cn/chinacopyright/channels/476.html.

State CouncilAdministrative organs for Intellectual Property Protection

State Intellectual Property Office of the P.R.C. (SIPO)

Patents, utility models, industrial designs

Patent Office • Taking the lead in drafting the revised Patent Law and associated

regulations;• Formulating the principles and policies for foreign-related IPR

affairs;• Devising plans for nation-wide patent development and the

expansion of the patent information network;• Establishing the standards for the determination of both patent

right and the infringement thereof, as well as designating and managing the authorities charged with patent determination, offering guidance to local authorities in the settlement of patent disputes, investigating and handling of passing-off of patent issues, taking charge in the review of patent agencies and in the qualification of personnel in foreign-related patent agencies;

• Promoting the dissemination and publicity of the Patent Law and related regulations

• Etc.

Patent Re-examination Board of SIPO• Examine the request for re-examination submitted by an applicant

who is not satisfied with a decision made by the SIPO rejecting a patent application or an IC layout design application;

• Examine the request for patent invalidation and the request concerning withdrawal of an exclusive right of an IC layout design;

• With responsibility for the litigation work where the patent re-examination board is considered as the defendant of an administrative lawsuit.

State Administration for Industry and Commerce of the P.R.C. (SAIC)

Trademarks

Trade Office :• Take charge of trademark registration and

administration;• Carry out, in accordance with law, the protection

of the exclusive rights of trademarks, investigation on trademark infringements, handling of trademark disputes, and the recognition and protection of well-known trademarks;

• Undertake the registration, filing and protection of special marks and official marks;

• Conduct study and analysis on information of trademark registration, and publish the information according to law to provide information services for the public and government’s policy-making;

• Implement the trademark strategy.

Trademark Review and Adjudication Board • Examine the request for re-examining the decision

made by the Trademark Office regarding rejecting a trademark registration application, not approving a trademark registration, or cancelling a registered trademark;

• Hear the application of declaring the registered trademark invalid

• Attend administrative lawsuit related to trademark review and adjudication in accordance of the law

• Etc.

National Copyright Administration of the P.R.C. (NCA)

Copyrights

NCA • To participate in the drafting of laws, regulations and rules in

relation to copyright, and to draw out copyright administrative policies and measures and organise the implementation;

• To draw out the national copyright strategy and plan and organise the implementation;

• To supervise the implementation of laws, regulations and rules in relation to copyright;

• To organise the investigate into and deal with significant and foreign-related copyright infringement cases, organise and coordinate the special raid or actions against copyright infringement and piracy;

• To organise and promote the national software legalisation work; • To undertake the work concerning the establishment of copyright

pubic service system, supervise and administer the work of copyright registration, etc;

• To supervise and administer the copyright evaluation, trading and licensing business, provide guidance on the management of state-owned copyright assets, and responsible for the work concerning the national copyright demonstration;

• To deal with foreign-related copyright relations；• Etc.

Copyright Protection Center of China (CPCC)• Copyright registration;• Copyright appraisal;• Supervising International Standard Record Coding (ISRC) Center of

China• Etc.

http://www.ncac.gov.cn/chinacopyright/channels/476.html

41

On 21st March, 2018, the Communist Party of China (CPC) Central Committee released

a plan to restructure SIPO by incorporating part of functions of the SAIC, and the

General Administration of Quality Supervision, Inspection and Quarantine, to improve

operations including separated administration and overlapping enforcement (Xinhua,

2018). The restructuring is planned to be completed before the end of 2018, and SIPO

was renamed National Intellectual Property Administration of PRC (CNIPA) on 28th

August, 2018. The new agency will perform the combined duties of protecting IPR,

accelerating the establishment of an IPR protection system, registering/granting and

administratively adjudicating trademarks, patents and geographical indication of origin

(Xinhua, 2018).

3.2.2 The judicial track

There are three different types of litigation relating to IP matters in China: civil,

criminal and administrative litigation. Civil and criminal litigation takes place in the

people’s courts, which comprise a four-tier system (Bosworth & Yang, 2000; Long &

Wang, 2015). An overview of the judicial system in China is shown in Figure 3.2.

According to the Civil procedure law of PRC (2012), a Basic Level People's Court shall

have jurisdiction as the court of first instance over civil cases, unless the case has

significant influences, or is determined by the Supreme People’s court to be under the

jurisdiction of a higher level of court, or is an important foreign-related case. However,

since IP related cases have certain characteristics such as a high degree of complexity,

specialism and professionalism, which may be beyond the capacity of basic courts to

handle, the Supreme People’s court have issued different regulations regarding the

jurisdiction of Local People’s Courts over IPR civil cases of the first instance6.

6 According to “Notice of the Supreme People’s Court on Issuing the Standards for the Jurisdiction of the

Basic People’s Courts over Intellectual Property Civil Cases of First Instance” (The Supreme People's

Court of China, 2010), all IP civil cases which do not meet the requirements of “a civil case with the

subject matter of action at a value of less than £20.6 million, and the trial of first instance of a civil case

where the place of domicile of one party is outside its territorial jurisdiction or where a foreign, Hong

Kong, Macao or Taiwan element is involved with the subject matter of action at a value of at least £10.3

million”, cases of first instance shall be under the jurisdiction of the intermediate people's court, except

those which shall be designated by the Supreme People's Court with jurisdiction in civil cases concerning

general IPR.

42

Figure 3.2: Judicial system in China.

Source: Bosworth, D. & Yang, D., 2000. Intellectual property law, technology flow and

licensing opportunities in the People's Republic of China. International Business

Review, 9(4), pp. 453-477.

If a party is not satisfied with the judgment of the first instance trial, they can make an

appeal to the people's court at the next level. However, for IP related cases, the Supreme

People’s court have stipulated that if the civil case involves professional technologies,

including a patent for invention, utility model patent, new variety of plants, layout

design of integrated circuit, know-how, computer software or monopolistic IP, the

Supreme People's Court shall accept the appeal. In addition, if not satisfied with a first-

instance judgment or ruling rendered for an IP-related administrative case involving

professional technologies including patent, new variety of plants, layout design of

integrated circuit, know-how, computer software and monopolistic IP, the Supreme

People's Court shall accept the appeal as well (Standing Committee of the NPC, 2018).

Starting from 1993, intellectual property tribunals have been established in the

intermediate and higher people’s court, and even in the basic level people’s court in

some specific cities (e.g., Beijing, and Shanghai) (Bosworth & Yang, 2000). As of

2014, there are 164 basic level people’s courts with jurisdiction in general IP civil cases

of first instance in 20 provinces or municipalities, and most of these courts are in

provinces or municipalities with more developed technology and economy, such as

Beijing, Jiangsu, Zhejiang, Guangdong, and Shanghai7 (The Supreme People's Court of

7 The number of basic level people’s courts with jurisdiction in general IP civil cases of first instance in

top five provinces or municipalities are: 12 courts in Beijing, 35 courts in Jiangsu, 32 courts in Zhejiang,

33 courts in Guangdong, and 6 courts in Shanghai.

43

China, 2015). In order to promote the implementation of the national strategy of

development driven by innovation and further strengthen the judicial protection of

intellectual property rights, Special Intellectual Property Courts were established in

Beijing, Shanghai, and Guangzhou by the end of 2014 (The Standing Committee of the

NPC, 2014). According to “Interpretation of the Supreme People's Court on the

Application of the Civil Procedure Law of the PRC” (The Supreme People's Court of

China, 2015), Patent infringement cases shall be under the jurisdiction of intellectual

property courts, as well as the intermediate people's courts and basic people's courts

specified by the Supreme People's Court8.

Courts are responsible for judicial enforcement regarding patents (Yang, 2003). There

are four major ways of dispute settlement in China: consultation, mediation, arbitration

and litigation. Among these, consultation, mediation and arbitration are preferred in

China due to cultural reasons. Compared with litigation, these are also more flexible,

less time consuming and costly (Yang & Clarke, 2005; Bosworth & Yang, 2000). Since

IPR protection is enforced via a dual-track system in China, disputes can either be

submitted to courts or the relevant administrative authorities (Cao, 2014). How are IPR

protected through legislations and how specifically have the IPR related laws evolved?

The following sections will discuss this.

3.3 The evolution of Chinese IPR related laws

In this section, we develop a deeper understanding of how the IPR related laws in China

have evolved over time. We start with introducing the overall picture of the Chinese

legislative system and the time when each revision was issued, and then discuss what

changes have been brought with each revision of each type of law.

8 The Supreme People’s court also issued Provisions on the Jurisdiction of the IP Courts of Beijing,

Shanghai and Guangzhou on 27th October 2014, which stipulated that the IP Courts have first instance

jurisdiction over the following cases (The Supreme People's Court of China, 2014): “1. Civil and

administrative cases involving patent, new plant varieties, layout designs for integrated circuits, technical

trade secrets, and computer software; 2. Court appeals against administrative acts involving copyright,

trademarks and unfair competition, made by State Council departments or the local governments above

county level; and 3. Civil cases involving the recognition of well-known trademarks. In addition, appeals

against IP civil and administrative first-instance judgments or orders made by the basic people’s courts in

the location of the IP courts involving copyright, trademark, technology contracts, unfair competition,

shall be under the jurisdiction of the IP courts. However, appeals against the first-instance judgments and

orders made by the IP Courts shall be under the jurisdiction of the IP trial division of the superior

people’s court in the location of the IP court”.

44

3.3.1 Legislative guidance

The Chinese legislative system operates on two levels (Figure 3.3). At the top, the

National People's Congress (NPC) is responsible for enacting and amending the

constitution, criminal, civil, and state organic laws and other basic laws (NPC, 2015). It

also handles the nominations and removals of presidents of the Supreme People's court

(Yang & Clarke, 2005). The Standing Committee of NPC enacts and amends all the

other laws except those that should be enacted by the NPC. The NPC functions through

the Standing Committee while it is not in session, and it can partially amend and

supplement national laws enacted by the NPC on the basis that the amendment or

supplement do not contravene the basic principles of national law (NPC, 2015). Its legal

function also includes legal interpretation, examination of bills drafted by the State

Council, and appointment and removal of vice presidents and judges of the Supreme

People’s Court, and members of the Judicial Committee (Yang & Clarke, 2005).

At the lower legislative tier, various local People's congresses, representing either

provinces, autonomous regions, municipalities, or ministries, are responsible for

enacting local decrees on the basis that they will not contravene any provision of the

Constitution, national law and administrative regulations (NPC, 2015). In addition, the

various ministries, commissions, the People's Bank of China, the Auditing Agency, and

a body directly under the State Council exercising regulatory function, may enact

administrative rules within the scope of its authority in accordance with national laws,

administrative regulations, as well as decisions and orders of the State Council (NPC,

2015).

Based on this system, China has three different types of legal code: national law,

administrative regulations, local decrees, autonomous decrees and special decrees, and

rules. National law has higher legal authority than administrative regulations, local

decrees and administrative or local rules. Administrative regulations have higher legal

authority than local decrees and administrative or local rules (NPC, 2015).

45

Figure 3.3: The legislative system of China.

Source: National People’s Congress (2015). The Legislation Law of The People’s

Republic of China

3.3.2 An overview of evolutionary changes in the Chinese IP system

The establishment of the Chinese IP system can be traced back to the end of the Qing

Dynasty (1636-1912), when the Qing government was forced to accept the revolution

and establish the modern legal system due to the introduction of Western capitalism

(Liu, 2015). “Reward Regulations on the Development of Technology”, “Trial

Procedures of Trademark Registration”, and “Copyright Law of Qing Dynasty” were

enacted in 1989, 1904 and 1910 respectively by the Qing government (Liu, 2015).

However, it is claimed that the society at that time was not prepared for such change

since the traditional Chinese culture has greatly affected people’s view of IP (Yang,

2003). The failure of this reform may be attributed to two reasons: first, people in China

lack understanding of the concept of IP due to the influences of Confucianism (Cao,

2014; Peng, et al., 2017). Second, Chinese people at that time valued agriculture highly,

but the development of industry and commerce were undervalued. The reform

challenged this traditional social ideology, but its own influence and inspiration were

too weak to reform successfully (Yang, 2003).

Although the reform failed and the Qing government was soon overthrown, these laws

were partially inherited by the following governments: The Provisional Government of

the Republic of China, Beiyang Government, and Nationalist government (this whole

period is from 1911 to 1949) (Liu, 2015). Due to the limitation of the specific economic

46

and social conditions, as well as the influence of traditional ethics and culture in China,

the IP related laws that existed during that period of time were not thoroughly

implemented, but they still influenced the Chinese society deeply (Liu, 2015; Yang,

2003).

In 1949, the PRC was established. However, during the first 30 years of establishment,

the public ownership system of sole production means was adopted under the theories

of Marxism, Leninism and Maoism. This system was not suitable for the development

of a market economy, and was also not able to provide the necessary social and

economic conditions for the establishment of an IP system (Liu, 2015). Therefore, it is

agreed by researchers that the establishment of a systematic IP system in China started

after 1978 when China adopted an “Open-door policy” (Liu, 2015; Yang, 2003). The

adoption of the “Open-door policy” initiated the beginning of a comprehensive

economic reform, which aimed to transform the planned economy to a socialist market

economy with “Chinese characteristics” (Hou, 2011; Yang, 2003).

Table 3.1 shows the milestones in the progress of China’s IP system. In 1979, China

and the US initiated a Sino-US Trade Agreement. One of the provisions stated that both

parties acknowledged the importance of protecting patents, trademarks and copyrights

in trade relations, and both parties agreed that the strength of IPR protection provided to

the individual or legal person from the other party’s country should be compatible with

the other party to give their own such protection (China and United States, 1979). Soon

after this, China signed the WIPO convention in 1980, and since then China has

undertaken a revolutionary transformation with respect to IPR from a country without

any protection to one with a broad and systematic system (Yang, 2003). The first

Trademark and Patent Laws were enacted in 1982 and 1984, respectively. The United

States Trade Representative (USTR) started publishing the Special 301 Report in 1989,

which evaluates the IPR protection strength of the US’s trading partners (USTR, 1989).

In the report published in 1989, China was put on the “Priority Watch list”, and the

report stated that as a trading partner to the US, China should make progress in

“enacting Copyright law (including copyright protection of software) and improve and

adequate patent protection for all classes of inventions” (USTR, 1989). It can be noted

that the Copyright Law was enacted a little later in 1990 (Regulations on Computer

Software Protection was also enacted one year later after the Copyright Law was

enacted). At the same time, China established SIPO and NCAC, and also joined the

Paris Convention for the Protection of Industrial Property, the Madrid Agreement

47

Concerning the International Registration of Marks, and the Washington Treaty on

Intellectual Property in Respect of Integrated Circuits during the same period of time.

Even though China enacted the Copyright law and copyright protection of software in

1990 and 1991 respectively, China was still on the priority watch list in the Special 301

Report published in 1990 due to its inadequate protection of patent (USTR, 1990). The

situation between China and the US was not getting better, and China was listed as one

of the priority foreign countries in 1991, which means the USTR must start a 6 months

section 301 investigation of that country within 30 days if such country was identified

as a priority foreign country, and measures might be taken by the USTR at the end of

the investigation (USTR, 1991). In the Special 301 report published in 1991, which

mentioned that China was the only major trading partner of US that offered “neither

product patent protection for pharmaceuticals and other chemicals, or copyright

protection for US works. Trademarks are granted to the first registrant in China

regardless of the original owner. Trade secrets are not adequately protected” (USTR,

1991).

In order to settle the Section 301 action, China and the US started a negotiation of IPR

protection in China in 1991, and entered into the “China-US: Memorandum of

Understanding on The Protection of Intellectual Property” (MOU) in 1992 (Kshetri,

2009). The MOU firstly required the Chinese government to revise its patent laws to

include chemical inventions (pharmaceuticals and agricultural chemicals) as its

patentable subject matter, and also provided requirements regarding term of protection,

compulsory licenses and rights conferred which should be included in patent law.

Second, the MOU required the Chinese government to enact a bill related to the

protection against unfair competition, which should be implemented before 1st January

1994. Third, the MOU also required China to accede to the Berne Convention for the

Protection of Literary and Artistic Works (Berne Convention) and Convention for the

Protection of Producers of Phonograms Against Unauthorized Duplication of Their

Phonograms (Geneva Convention), the Chinese government was required to issue new

regulations to comply with these two conventions and the MOU (China and United

States, 1992). It can be noted that China revised its Patent law (1992) and Trademark

law (1993), and enacted Anti-unfair competition law (1993). China not only joined the

Berne Convention (1992) and Geneva Convention (1992) as required by the MOU, but

also acceded to a series of the international IP treaties, such as Universal Copyright

Convention, Patent Cooperation Treat, Nice Agreement Concerning the International

48

Classification of Goods and Services for the Purposes of the Registration of Marks,

Trademark Law Treaty, etc.

China started to prepare for entering the WTO in 1995 as an observer, and a series of

negotiations started then. China finally became a member of WTO on 11th December

2001. As a compulsory requirement for becoming a member of the WTO, China also

had to improve its IP system to comply with the minimum standards of the Agreement

on TRIPS (Li & Yu, 2015; Keupp, et al., 2009). Table 3.1 shows that during this period,

China revised all IP laws: Patent law (2000), Trademark law (2001), Copyright law

(2001), and Regulations on Computer Software Protection (2002). China also enacted

the Regulations of the People’s Republic of China on the Protection of New Varieties of

Plants (1997) and The Protection of Layout-Designs of Integrated Circuits (2001).

Table 3.1: Milestones of the evolution of Chinese IP system: from 1978 – present

Year

Major international IP Treaties China

joined (year of accession) Chines IP laws and important events

1978 • “Open-door” policy is adopted

• Trademark Office was established

directly under SAIC

1979 Signed Sino-US Trade Agreement

1980 Convention Establishing the World

Intellectual Property Organization (WIPO Convention)

SIPO is established

1982 Trademark law (1st edition)

1984 Paris Convention for the Protection of

Industrial Property

Patent law (1st edition)

1985 NCAC was established

1989 Madrid Agreement Concerning the

International Registration of Marks

1990 Washington Treaty on Intellectual Property in Respect of Integrated Circuits

Copyright law (1st edition)

1991 Regulations on Computer Software Protection (1st edition)

1992 • Berne Convention for the Protection of

Literary and Artistic Works

• Universal Copyright Convention

• Convention on Biological Diversity

• Signed China-US: Memorandum of

Understanding on The Protection of

Intellectual Property

• Patent law (2nd edition)

1993 • Patent Cooperation Treat

• Convention for the Protection of Producers of Phonograms Against

• Anti-unfair competition law (1st

edition)

• Trademark law (2nd edition)

49

Unauthorized Duplication of Their

Phonograms (Geneva Convention)

1994 • Nice Agreement Concerning the

International Classification of Goods

and Services for the Purposes of the

Registration of Marks

• Trademark Law Treaty

1995 • Protocol Relating to the Madrid

Agreement Concerning the

International Registration of Marks

• Budapest Treaty on the International Classification of Goods and Services

for the Purposes of the Registration of

Marks

1996 • Locarno Agreement Establishing an International Classification for

Industrial Designs

• Strasbourg Agreement Concerning the

International Patent Classification

1997 Regulations of the People’s Republic of

China on the Protection of New Varieties

of Plants (1st edition)

1999 International Convention for the

Protection of New Varieties of Plants

(UPOV Convention)

2000 Patent Law (3rd edition)

2001 The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)

• Join WTO

• Trademark Law (3rd edition)

• Copyright Law (2nd edition)

• The Protection of Layout-Designs of

Integrated Circuits (1st edition)

2002 Regulations on Computer Software

Protection (2nd edition)

2004 Convention for the Safeguarding of the Intangible Cultural Heritage

2006 Convention on the Protection and Promotion of the Diversity of Cultural

Expressions

• Issued National Guideline for

Medium- and Long-term Scientific and Technological Development (2006-

2020)

2007 • WIPO Copyright Treaty (WCT)

• WIPO Performances and Phonograms

Treaty (WPPT)

• Singapore Treaty on the Law of

Trademarks

2008 • State Council issued Outline of the

National Intellectual Property Strategy

• Patent Law (4th edition)

50

2010 Copyright Law (3rd edition)

2011 Regulations on Computer Software

Protection (3rd edition)

2012 Beijing Treaty on Audiovisual Performances

2013 Marrakesh Treaty to Facilitate Access to

Published Works for Persons Who Are Blind, Visually Impaired or Otherwise

Print Disabled

• Trademark Law (4th edition)

• Regulations on Computer Software

Protection (4th edition)

• Regulations of the People’s Republic

of China on the Protection of New Varieties of Plants (2nd edition)

2017 Anti-unfair Competition Law (2nd edition)

Sources: WIPO, 2018. China [Online] Available at:

http://www.wipo.int/wipolex/en/profile.jsp?code=CN;

China Intellectual Property Rights Protection Website, 2018. International treaties on

IPR [Online] Available at: http://www.ipr.gov.cn/zhuanti/law/conventions/index.html.

Some researchers claim that the revisions of the law that happened around 2000 were

mainly attributed to the pressure of becoming a member of the WTO (Yang & Clarke,

2005), however, the next round of IP laws revisions that happened after 2008 are

proposed to respond to the domestic needs (Kshetri, 2009). In 2006, the State Council

issued “the guidelines on national medium- and long-term program for science and

technology development (2006-2020)”, which stated that China aims to become an

“innovation-oriented” country within 15 years’ development. In 2008, the State Council

issued “the Outline of the National Intellectual Property Strategy”, which not only

reaffirmed the goal of making China an innovative country, but also strengthened the

importance of IP protection to China. It mentioned the plan to improve the IPR regime

by improving the IP laws and regulations and IP law enforcement, strengthening the

IPR protection by revising laws and regulations regarding IP infringement punishment

(State Council, 2008). Therefore, in order to comply with the plan, almost all the IP

related laws and regulations were further revised after 2008.

By reviewing the milestones in the progress of the Chinese IP system, it can be noted

that the Chinese IP system has experienced 4 waves of change: 1. Establishing a

systematic IP system during early 1980s. 2. Revising the 3 main IP laws and issued

http://www.wipo.int/wipolex/en/profile.jsp?code=CN

51

some IP related regulations during early 1990s due to pressure from the US

government. 3. Revising the IP laws and regulations around 2000 for the purpose of

becoming a member of the WTO. 4. Improving the IP laws and regulations after 2008 in

order to comply with the development goal of the Chinese government. However, from

previous studies, it is not clear whether and which of these three waves of change

brought a radical improvement to the Chinese IP system.

Ginarte and Park (1997) developed an index of patent systems strength which can be

used to reflect the quality of the patent law (Brander, et al., 2017). This index is based

on five elements: coverage (patentability of varied types of products), membership in

international treaties, duration of protection, enforcement mechanisms, and restrictions

on patent rights. Most of the products listed by Ginarte and Park are patentable in

China, and China also joined all the international treaties listed by them. Therefore,

based on the five aspects developed by Ginarte and Park (1997) which are used to score

patent systems strength, and also considering the characteristics of Chinese law, we

build a new five-dimensional assessment scheme which is used to analyse the changes

of the IP law revisions. A revision of IP law could be viewed as improvement if: (1) the

scope of protection is expanded; (2) the duration is extended to be consistent with the

international standards, the procedural provisions are simplified and clearly defined

regarding application, transferring IP rights, declaring an IP right invalid, re-examining,

etc.; (3) enforcement mechanisms9: more powers are granted to administrative and

judicial authorities, and each of their duties are defined clearly; (4) protection strength

of IP rights10: the types of acts considered as infringement are clearly defined, and

punishment for IP infringer is increased; (5) the restrictions on IP rights are clearly

defined, and consistent with international standards. In the following section, we

analyse more precisely what changes each revision of the three main IP laws (Patent

law, Copyright law, and Trademark law) introduced based on these five aspects, and

detailed content regarding these revisions are shown in Appendix A111).

9 Enforcement mechanism refers to the types of power can be exercised by administrative and judicial

authorities, and how to exercise those power. 10 Protection strength of IP rights refers to what type of act will be considered as infringement, and the

punishment IP infringer will receive. 11 The content in the Appendix A1 is summarised and directly cited from the provisions of IP laws in

China.

52

3.3.3 First wave of revisions (1990s)

Unlike Patent law and Trademark law which were enacted in 1980s, the Copyright law

was first enacted in 1990, so the first wave of revisions happened during 1990s only

involved Patent law and Trademark Law, and these will be analysed below.

3.3.3.1 Patent law (1992)

In the previous section we stated that the MOU required the Chinese government to

revise its patent law to include chemical inventions as patentable subject matters, and

also provided requirements regarding term of protection, compulsory licenses and rights

conferred which should be included in patent law. From the main aspects of patent law

that were revised in 1992, it can be noted that the revisions generally meet such

requirements of the MOU.

First, with regard to scope of protection, the 1992 amendment not only expanded

patentable subject matter by removing “Food, beverage and condiment; Drugs and

substances obtained by chemical means”12 from the list of subjects which shall not be

granted patent rights, but also extended the protection of patented methods to include

“use, sell the products that are developed directly through the use of the patented

method”13. In addition, the 1992 amendment granted a new right to the patentee14. The

1992 amendment added that the foreign applicant enjoys the same right of priority as

the Chinese applicant15. Second, the first revision of patent law extended the duration of

patent protection from 15 to 20 years for invention patents to comply with international

standards (e.g., EPO, JPO), and the duration of utility model patent and design patent

was extended from 5 to 10 years16. This harmonised most national IP regimes. The

revision also perfects the procedure provision of patent application, examination and

approval of patent applications, which include the following aspects: further clarified

the scope of patent application documents that can be modified17; the 1992 amendment

added more detailed provisions that are related to declaring a patent right invalid18; and

12 Patent law, 1984, Article 25, section(s) 4 & s5. 13 Patent law, 1992, Article 11, paragraph 1. 14 Patent law, 1992, Article 11, paragraph 3. 15 Patent law, 1992, Article 29. 16 Patent law, 1992, Article 45. 17 Patent law, 1992, Article 33. 18 Patent law, 1992, Article 50.

53

the time limit for revoking a patent right changed from “within three months since the

date the patent office announces the patent application”19 to “within six months since

the date that the patent office announced the grant of patent right”20. Third, the 1992

amendment strengthened the patent rights protection by adding a provision that is

related to punishment of counterfeits21. Fourth, the amendment changed the conditions

for compulsory licensing for exploitation of a patent by putting more restriction on the

administrative department to grant a compulsory license for exploitation of a patent22.

3.3.3.2 Trademark law (1993)

Some researchers argue that the Chinese IP laws drafted are greatly affected by the

international treaties and conventions China joined (Yang & Clarke, 2005). Before

China first revised its Trademark law in 1993, it joined the Madrid Agreement

Concerning the International Registration of Marks in 1989, seven years after it enacted

the first Trademark law. Yang and Clarke (2005) claimed that the 1993 amendment of

Trademark law in China is based on the Madrid Agreement. The 1993 amendment

mainly covers changes in 3 aspects:

First, the 1993 amendment included service trademarks in the law in addition to

trademarks for goods, it also added certain type of “geographic names” that cannot be

used as trademarks23. Second, it perfects the procedures for Trademark Registration by

making changes of three different aspects: (1) Simplified the procedure “Where same

applicant for registration of a trademark intends to use the same trademark for goods in

different classes”24. (2) Added a new provision in article 27 which provides that the

trademark office shall cancel the registered trademark if “the registration of a trademark

was acquired by fraud or any other unfair means”. Third, strengthened the protection of

trademarks by not only enlarging the scope of acts that shall be considered infringement

of registered trademarks, but also made more detailed provisions regarding

counterfeiting a registered trademark25. In addition, the 1993 amendment specified that

19 Patent law, 1984, Article 41. 20 Patent law, 1992, Article 41. 21 Patent law, 1992, Article 63, paragraph 2. 22 Patent law, 1992, Articles 51&52. 23 Trademark law, 1993, Article 4, and Article 8. 24 Trademark law, 1993, Article 12. 25 Trademark law, 1993, Article 38.

54

when the case is serious enough to constitute a crime, the party shall be prosecuted

according to the law (Article 40).

It can be noted that the revisions in 1990s did improve the quality of both Patent law

and Trademark law regarding its protection scope, duration and the procedures of

application/registration, and protection strength. Although some researchers argue that a

relatively complete trademark legal system was basically established in China with this

revision (He, 2013), and the revision also narrowed down the gap between Chinese

Patent law and international standard of patent protection, the improvement is still

limited.

3.3.4 Second wave of revisions (2000s)

In the previous section we show that China prepared for joining the WTO from 1995,

since it is the member country’s obligation to provide appropriate IP laws which should

comply with the minimum standards of TRIPS (Papageorgiadis & McDonald, 2018).

Researchers argue that joining the WTO served as accelerator for improving the existent

laws of IP in China (Wang, 2004), and it is widely agreed that all relevant Chinese IP

laws revised during this period of time (for example, Patent law (2000), Trademark law

(2001) and Copyright law (2001)) are for the purpose of fulfilling such obligations (Cox

& Sepetys, 2009; Li & Yu, 2015). The revisions of each type of law will be analysed in

more detail in below.

3.3.4.1 Patent law (2000)

Compared with the 1992 amendment of Patent law, the 2000 amendment involved

changes to 35 provisions. The major differences between the 1992 and 2000

amendments can be summarised in five different aspects.

First, the 2000 amendment enlarged the scope of patent rights protection by including

“offer to sell the patented production or the products that are developed directly through

the use of patented method”26 to be one type of the acts that a patentee can prohibit

others to exploit the patent without his/its permission. Second, it deleted all the

26 Patent law, 2000, Article 11, section 1.

55

provisions related to revoking patent rights, and only kept the provisions related to

declaring a patent right invalid to avoid the confusing when implementing relevant

provisions. The 2000 amendment simplified the procedures for Chinese unit or

individual applying for patent in a foreign country, and the procedures to transfer a

patent right to a foreigner27. In addition, it also perfects the procedures of declaring a

patent invalid and protecting patent rights28.

Third, with regard to enforcement mechanism, the changes made to Patent law include:

(1) the 2000 amendment clearly defined the job functions of the IP related

administrative departments, and also specified the obligations of the relevant

administration department29. (2) Added pre-litigation provisional measures that a

patentee can take to protect his/its rights30. (3) The amendment provides that an

application for a patent for utility model or design or a patent reexamination or

invalidation shall finally be examined by the court31, while such final decisions in the

1992 amendment are made by the Patent review board.

Fourth, it strengthened the protection of IP by revising the Patent law in accordance to

the requirement of TRIPS. The changes made to Patent law not only include adding a

provision to protect the bona fide third party from considering his/its act as infringement

in Article 6332, but also clarified the way to calculate the amount of compensation33.

Last but least, modified the conditions for granting a compulsory license by putting

more strict conditions on granting a compulsory license for exploitation of a patent34.

Some scholars claim that this revision made Patent law one of the laws closest to the

TRIPS standards in the Chinese IP system, with some provisions even the same as what

is required in TRIPS or very close to the requirement (Liu, 2002). However, some

researchers found that a patent protection gap still exists between China and other

developed countries, which indicates that the patent system in China could be further

improved (Gao, 2008).

27 Patent law, 2000, Articles 19 & 20. 28 Patent law, 2000, Articles 45, 46, 47. 29 Patent law, 2000, Articles 66 & 67. 30 Patent law, 2000, Article 61. 31 Patent law, 2000, Article 41 s2; Article 46, s2. 32 Article 63 provides that if anyone “uses, or sells a patented product without knowing that such product

is produced and sold without permission of the patentee, or such product is directly obtained by using the

patented method, he shall not be liable for compensation provided that the legitimate source of the

product can be proved”. 33 Patent law, 2000, Article 60. 34 Patent law, 2000, Articles 51, 52, 55.

56


The purpose of revising the Trademark law in 2001 was for joining the WTO and

meeting the minimum requirement of TRIPS, similarly to the revisions of the revising

Patent law and Copyright law. The 2001 amendment of Trademark law revised 23

articles of the 1993 Trademark law and added 23 articles, it is stated that this revision

has greatly changed content of 1993 Trademark law (Xiao, 2007). The changes are

summarised in the following points.

First, regarding the scope of protection, the changes made to Trademark law include: (1)

Enlarged the scope of applicants by granting a “natural person” the right to apply for

trademark registration, as well as adding a situation where more than one applicant can

“jointly file an application” and “jointly enjoy and exercise the exclusive right to use the

trademark”35. (2) It not only expanded the types of visual signs that can be registered as

trademarks and the types of trademarks, but also modified and revised the cases when a

sign cannot be used or registered as a trademark36. (3) In order to keep consistent with

provisions of TRIPS, the 2001 amendment added provisions to protect well-known

trademarks37.

Second, the new amendment perfected the procedures related to application for

trademark registration and assignment of registered trademarks, as well as the

procedures related to requiring the Trademark Review and Adjudication Board for

adjudication of trademarks with disputes38.

Third, the enforcement mechanism is improved in following aspects: (1) Established a

judicial review system for reviewing the decision or adjudications made by the

administrative departments39. (2) Assigned certain power to the administrative authority

for industry and commerce to protect the trademark right, stop and punish trademark

35 Trademark law, 2001, Articles 4&5. 36 Trademark law, 2001, Articles 8-12. 37 Trademark law, 2001, Article 14. 38 Trademark law, 2001, Articles 26, 29, 33. 39 Trademark law, 2001, Articles 32, 34, 43.

57

infringement40. (3) The newly added articles 5741 and 5842 are related to “property

preservation before litigation” and “evidence preservation”. (4) The 2001 Trademark

law added the obligations of the staff member who works in relevant administrative

departments43.

Fourth, it strengthened the protection strength of Trademark law by increasing the

amount of compensation. In particular, the 2001 Trademark law not only added “the

appropriate expenses of the infringee for stopping the infringement” to be part of the

compensation, but also confirmed that “the People's Court shall impose an amount of

damages of no more than £51,50044 according to the circumstances of the infringement

if it is difficult to determine the profit that the infringer has earned or the injury that the

infringee has suffered”45.

Some researchers claim that the 2001 amendment basically implemented the relevant

requirements of TRIPS, with no big difference when comparing with the international

trademark rules regarding the overall framework and major system design of the

trademark legislation (He, 2013; Jin, 2013). However, gaps still exist between the

Chinese Trademark law and TRIPS standards in several different aspects, such as

protection standards and level of Chinese Trademark law are comparative low, more

subjects should be included in the scope of protection content (Wei, 2012).

3.3.4.3 Copyright law (2001)

The Copyright law enacted in 1990 has 56 articles, and the first amendment of

Copyright law has 60 articles, of which 53 are modified or added. The purpose of

revising the Copyright law was also to meet the minimum requirements of TRIPS, so

this amendment is basically modified according to the relevant provisions of the Berne

Convention for the Protection of Literary and Artistic Works, TRIPS and other related

40 Trademark law, 2001, Articles 53, 54, 55. 41 Article 57 provides that a trademark registrant or interested parts may file an application with the

People's Court to take measures for property preservation before litigation if he/it has evidence to show

that another person is committing or will commit an infringement of the right to use its or his registered

trademark, and irreparable damages will be caused if failing to stop the infringement. 42 Article 58 provides that “In order to stop an infringing act, any trademark registrant or interested party

may file an application with the People's Court for evidence preservation before instituting legal

proceedings where the evidence will possibly be destroyed or lost or difficult to be obtained again in the

future”. 43 Trademark law, 2001, Articles 60, 61, 62. 44 We use the average exchange rate of RMB to GBP, 1 RMB = £0.103 45 Trademark law, 2001, Article 56.

58

international treaties, as well as the development of the internet (Gao, 2002). The

changes of the Copyright law can mainly be categorised into 5 different aspects, which

are analysed in more detail below.

First, the 2001 amendment redefined the protection content and scope in the Copyright

law. The changes made in this category comprise four parts: (1) Expanded the objects of

copyright protection by including “acrobatic works, architecture, works created by

virtue of an analogous method of film production, model works, and a work that is

created by compilation of several works, parts of works, data that do not constitute a

work or other materials and having originality in the selection or arrangement of its

contents”46. (2) Specified the copyright in the internet environment47. (3) Added new

types of personality rights and property rights that should be included in copyrights48.

(4) The 2001 amendment added a requirement that a producer of sound recordings or

video recording or the publisher shall obtain permission from the copyright owner for

exploiting its/his work49. (5) Modified and strengthened the rights of the owner of

“neighbouring rights”50 can enjoy51. (6) Changed the rights that shall be enjoyed by the

owner of a cinematographic work52.

Second, the new amendment requires that assignment of a copyright shall conclude a

contract in writing, and specifies the basic clauses that should be included in the

contract. The 2001 Copyright law also revoked the provision that “the term of validity

of a contract shall not exceed 10 years”53.

46 Copyright law, 2001, Article 3.

47 Copyright law, 2001, Article10, s12; Article 37, s6; Article 41, 42, 47, 48. 48 Copyright law, 2001, Article10. 49 Copyright law, 2001, Article39. 50 Neighbouring rights, also referred to as related rights, are defined as “protect the legal interests of

certain persons and legal entities that contribute to making works available to the public or that produce subject matter which, while not qualifying as works under the copyright systems of all countries, contains

sufficient creativity or technical and organizational skill to justify recognition of a copyright-like property

right. Traditionally, related rights have been granted to three categories of beneficiaries: performers,

producers of phonograms and broadcasting organizations” (WIPO, 2016). 51 For example, the 2001 amendment added that “a publisher has the right to license or prohibit any other

person to use the typographical arrangement of books or periodicals he has published, the term of

protection for such right is 10 years”. The types of rights a producer of sound recordings or video

recordings can enjoy expanded from “to authorize others to reproduce“ to “reproduce, distribute, rent and

communicate to the public on an information network”. 52 Copyright law, 2001, Article15. 53 Copyright law, 1990, Article 26.

59

Third, the strength of copyright protection provided by the relevant administrative

departments and judiciary authorities is enhanced. The new amendment54 not only

clearly defined the legal status of the copyright administration department, but also

expanded the administrative penalties that the copyright administration department may

impose to deal with the infringement. It added new articles regarding specific measures

that the People’s Court could take to protect the rights of copyright owners, the

amendment also specifies that the court should make a decision within 48 hours

regarding whether or not to take such measures55. Furthermore, it added a new article

which provides that the publisher or producer of a reproduction, the distributor of a

reproduction, and the renter of the reproduction of a cinematographic work has the

obligation to provide evidence to prove that his/its distributed or rented reproduction

has been from a lawful source56.

Fourth, several provisions are modified so that the copyright protection by judiciary

authorities can be further strengthened. The revisions include: (1) Article 46 adds new

types of infringement acts that should bear civil liability, such as “plagiarizing a work of

another person”, “exploiting the typographic arrangement of a book or periodical

without the permission of the publisher”, etc. (2) Article 47 adds new types of

infringement acts that should bear civil liability, and in some circumstances, it may bear

administrative penalties, or the infringer may be prosecuted if the act constitutes a

crime. For example, “distributing, performing, showing, broadcasting, compiling or

communicating to the public on an information network a work created by another

person, without the permission of the copyright owner”. (3) Clarified how to calculate

and decide the amount of compensation57.

54 Article 47 provides that if the infringement is harming the public interest at the same time, “a copyright

administration department may order to cease the infringing act, confiscate unlawful income from the act,

confiscate and destroy infringing reproductions and impose a fine. where the circumstances are serious,

the copyright administration department may also confiscate the materials, tools, and equipment mainly

used for making the infringing reproductions”. 55 Copyright law, 2001, Article50. 56 Copyright law, 2001, Article52. 57 Articles 48 provides the amount of compensation shall be “the actual injury suffered by the right holder,

where the actual injury is difficult to compute, the damages shall be paid on the basis of the unlawful

income of the infringer. The amount of damages shall also include the appropriate fees paid by the right

holder to stop the infringing act”. It also specifies that if “the right holder's actual injury or infringer's

Unlawful income cannot be determined, the People's Court shall Judge the damages not exceeding

£51,500 depending on the circumstances of the infringing act”.

60

Fifth, it narrowed down the scope of reasonable use of copyright, and also revised

several occasions that do not need the permission from the copyright owner58.

These five aspects of changes show that the 2001 amendment brought a tremendous

change to the Copyright law in China. This amendment not only narrowed down the gap

between the Copyright law of China and relevant international treaties, but also

improved the level of protections for copyright owners (Gao, 2008). The revision is also

important for the growth of creative industries in China, such as software design.

3.3.5 Third wave of revisions (since 2008)

In order to achieve the goal of making China an innovative country, “the Outline of the

National Intellectual Property Strategy” issued in 2008 specified that one of the

strategic focuses is to improve the IP regime by promptly revising Patent law,

Trademark law and Copyright law and related regulations (State Council, 2008).

Another wave of IP laws revisions started since then. Some researchers claim that the IP

law revisions conducted during this period are driven by the domestics needs for the

first time in the IP regime development history in China (Wu, 2009).

3.3.5.1 Patent law (2008)

Researchers argue that the 2008 Patent law was motivated neither by external pressure

nor by the pressure of complying with international treaties. The amendment this time

was enacted mainly for China’s own goal of improving its innovation ability by

enhancing the level of IP protection (Li & Yu, 2015; Yang & Yen, 2009). The 2008

amendment modified 36 articles, and the revisions can be categorised into five aspects.

First, the 2008 amendment raised the standards for patent applications. For example, the

novelty requirement for patentability is raised from a “relative novelty” standard to an

“absolute novelty” standard. The requirement of “creativity” is also changed from

comparing with technologies available before the date of application into comparing

58 For example, article 23 states that “in compiling and publishing textbooks for implementing the nine-

year compulsory education and the national educational program, parts of published works, short written

works, music works or single copies of works of painting or photographic works may be compiled into

textbooks without the authorization from the authors, except where the authors have declared in advance

the use thereof is not permitted”.

61

with the existing technologies. The requirements for granting a patent right to a design

are also raised59. Restrictions have been put on the patent right in the 2008 amendment,

which provides that only one patent can be granted for the same invention60. More

importantly, the 2008 Patent law add provisions of generic resources61. Furthermore, it

enlarged the scope of patent protection by adding “offer to sell” to be the type of acts

which requires permission of the patentee if a unit or individual intends to exploit a

design patent62.

Second, the new amendment reduced the requirements for a Chinese unit or individual

to apply for a patent abroad, and the requirement for foreigner/foreign enterprise/foreign

organisation to apply for a patent in China, as well as the requirements when a Chinese

unit or individual intends to transfer the patent right to a foreigner/foreign

enterprise/foreign organisation63.

Third, the amendment strengthened the administrative enforcement of patent protection

so that the IPR protection level of China can be improved. For example, the revisions

include increasing the administrative penalty standards from imposing a fine of no more

than three times the unlawful gain to four times to a person who counterfeits the patent

of another person, and a fine of no more than £5,150 increased to £20,600 which may

be imposed on him if there are no unlawful gains64. It also specified special measures

that can be taken to protect patent rights, for example, it firstly added the provisions of a

pre-litigation provisional measure by citing relevant provisions from the Civil

Procedure law65.

Fourth, strengthening patent protection is one of the aspects that the 2008 amendment

focused on. The revisions of this aspect are constituted by revising the situations that are

not considered as infringement, and perfecting the provisions regarding compensation

for infringement. For example, the fine imposed on the patent infringer increased from

no more than 3 times of the unlawful gains, in addition to confiscate the unlawful gains,

59 Patent law, 2008, Articles 22&23. 60 Patent law, 2008, Article 9, s1. 61 Article 5 provides that “Patent rights shall not be granted for inventions that are accomplished by

relying on genetic resources which are obtained or used in violation of the provisions of laws and

administrative regulations”. Article 26 specifies that “the patent application documents shall indicate the

direct and original source of the genetic resources if the invention-creation accomplished by relying on

genetic resources”. 62 Patent law, 2008, Article 11, s2. 63 Patent law, 2008, Article 10, s2; Article 19, s1; Article 20, s1. 64 Patent law, 2008, Article 63. 65 Patent law, 2008, Articles 66&67.

62

to no more than 4 times. The fine imposed on the patent infringer increased from no

more than £5,150 to £20,600 if there are no unlawful gains66. Fifth, it perfected

provisions of compulsory license, for example, the newly-added article 50 provides that

a compulsory license for manufacturing a drug which is protected by patent rights can

be granted for the benefit of public health.

To summarise the revisions made in the 2008 amendment, the scope of patent

protection is expanded, the strength of patent protection of both administrative

departments and the People’s court is greatly enhanced, it is claimed that this

amendment further improved the patent protection in China and will help to promote

scientific and technological progress and economic and social development (Guo,

2009).


Some researchers claim that the third revision of Trademark law is also mainly aimed to

meet the domestic needs and solving the problems that have existed when practicing

trademark law in past 10 years after the second revision (He, 2013; Jin, 2013). The 2013

amendment of Trademark law modified 53 articles of the 2001 Trademark law, and the

total number of articles increased from 64 to 73. The revisions of this amendment are

categorised into five parts, which are analysed in more detail below.

First, the revisions related to the scope of protection include: (1) Regarding the types of

signs that can be registered as trademarks by including “sound” to be one of the signs

that can be registered67. (2) Modified the types of signs that cannot be used as

trademarks, for example, the 2013 amendment specifies that the signs that are likely to

mislead the public in terms of the quality, place of production or other characteristics of

the goods cannot be used as trademarks68. (3) The 2013 Trademark law perfect the rules

to protect well-known trademarks69. (4) Strengthened the protection of unregistered

trademarks70. (5) Specified a situation where using a registered trademark or an

unregistered well-known trademark of another party as the trade name in its enterprise

name and mislead the public constitutes unfair competition71.

66 Patent law, 2008, Article 63. 67 Trademark law, 2013, Article 8. 68 Trademark law, 2013, Article 10. 69 Trademark law, 2013, Articles 13&14. 70 Trademark law, 2013, Article 15, paragraph 2. 71 Trademark law, 2013, Article 58.

63

Second, it improved the procedural provisions by bringing changes to following points:

(1) Perfect the provisions regarding raising objection of the trademark registration72. (2)

Established that “good faith” should be the fundamental principle that should be upheld

in the application for trademark registration and in the use of trademarks73. (3) Revised

the provision of renewal, transfer and licensing of registered trademarks74. (4) In order

to reduce confusion among “revoking a registered trademark”, “disputes/opposition”,

and “declare a registered trademark invalid”, the 2013 amendment changed Chapter 5

from “Adjudication of disputes concerning registered trademarks” to “Declaration of the

invalidity of registered trademarks”. (5) The 2013 Trademark law also added relevant

provisions regarding declaring the registered trademark invalid75. (6) New provisions

are added regarding the time limit for trademark examination76.

Third, regarding the enforcement mechanism, the amendment not only authorised the

trademark office the power to require the applicant to explain or correct the contents of

the trademark registration application during the interview, but also strengthened the

law enforcement of administrative departments77. Most importantly, it reduced the

burden of right holders to provide evidence78. In addition, it also specified the activities

of the trademark agency79.

Fourth, it strengthened the protection of trademark rights by expanding the type of acts

that will be considered infringement acts, as well as increasing the legal compensation

for infringement. The 2013 Trademark law not only provided a clear procedure of how

to decide the amount of compensation that the infringer should pay, but also increased

the amount of compensation from £51,500 in 2000 to £309,000 in 2013 if “it is difficult

to determine the actual loss suffered by the right holder as a result of the infringement,

the profits gained by the infringer from the infringement or the royalties of the

72 Trademark law, 2013, Articles 33&35. 73 Trademark law, 2013, Article 7, paragraph 1 74 Trademark law, 2013, Chapter IV. 75 Trademark law, 2013, Articles 46&47. 76 Trademark law, 2013, Articles 28, 34, 35. 77 For example, the 2013 amendment specified that the fine that the local administrative department for

industry and commerce can impose, by providing that “if the illegal business revenue is £5,150 or more, a

fine of up to 20% of the illegal business revenue may be imposed; if there is no illegal business revenue

or the illegal revenue is less than £5,150, a fine of up to £1,030 may be imposed” (Article 60, paragraph

2). 78 Trademark law, 2013, Article 63. 79 Trademark law, 2013, Articles 19&20.

64

registered trademark concerned”80. Last but not least, the amendment added restrictions

on the exclusive rights of registered trademark81.

It has been stated that when practicing the 2001 Trademark law, several problems exist.

For example, the trademark registration process is complicated, and the trademark

protection needs to be strengthened (He, 2013). After reviewing all the revisions

introduced with the 2013 amendment, it is stated the main system and basic functions of

trademark law have been relatively completed, the revision could also help to improve

the economic environment in China (Jin, 2013).

3.3.5.3 Copyright law (2010)

Different from the massive revisions that have been done to Patent law and Trademark

law, only two articles of Copyright have been revised in 2010. First, the 2010

amendment specified that the State has the right to supervise and manage the

publication or distribution of works in accordance with the law (Article 4). Second, the

newly added article 26 provides that “In case of a pledge over copyright, the pledger

and pledgee shall register the pledge concerned with the copyright administration

department under the State Council”, which is related to copyright licensing and

assignment contracts.

In summary, after reviewing various aspects of the changes introduced with each law

revision in detail based on the later three waves of change, it can be noted that each

revision improved the IP law by (1) expanding the scope of protection, (2) clarifying

and simplifying the application, approval, re-examination and dispute solving processes,

(3) granting more power to the courts, allowing the administrative penalties to be

imposed by administrative departments, and (4) enhancing the protection strength of IP

laws by increasing the amount of compensation. The revisions made around the early

1990s only cover limited aspects82, and are mainly a response to the requirements made

by the US government. The amendments enacted around the year 2000 for the purpose

80 Trademark law, 2013, Article 63. 81 Trademark law, 2013, Article 59. 82 For example, the changes made in the 1993 Trademark law amendment only covers 3 aspects:

protection scope, the procedures of application/registration, and protection strength.

65

of complying with the minimum requirements of TRIPS. For example, there are several

provisions added for this purpose, to include “offer to sell” to be one of the acts that a

patentee can prevent others from exploiting the patent without its/his permission in

Patent law, added provision of protecting “well-known” trademarks in Trademark law,

and strengthening owner’s “neighbouring rights” in Copyright law. All three IP laws

specified the way to calculate compensation and Trademark law and Copyright law also

modified certain provisions so that the power of judiciary authorities can be further

strengthened.

Following a decade of strong technological and economic developments, the revisions

made after 2008 were mainly motivated by the need to improve China’s innovation

ability and transformation of the economy. Both Trademark law and Patent law further

increased the amount of compensations, and they also authorised more power to both

administrative department and judiciary authorities to strengthen the law enforcement.

In addition, the 2008 Patent law raised the standards for patent applications so that the

quality of patents applied for in China could be improved. According to the five aspects

we used to analyse all the revisions, the revisions introduced around the year 2000

covered almost all of these five aspects, as well as the amendments of Patent law and

Trademark law enacted since 2008. It can be concluded that the quality of Chinese IP

laws in books is radically improved in early 2000s, and such quality is further enhanced

in 2008.

3.4 IP protection enforcement and IP activities in China

In the previous sections, we have reviewed the “dual-track” IP system in China and

what changes have been made in IP laws in early 1990s, around 2000, and after 2008. In

this section, we analyse the impact of these changes on IP activities of China during

these periods. First, we discuss their trends in relation to IP enforcement in China, and

then we discuss how patent applications and grants, and trademark registrations in

China have changed through time.

66

3.4.1 IP protection enforcement in China

Among the defects of the Chinese IP system which are discussed in previous studies,

weak IP protection enforcement in China is one of the most prominent weakness

highlighted by several studies (Cao, 2014; Greguras, 2007; Hu & Jefferson, 2009; Liu,

2005). In this section, we will focus on analysing the IP protection enforcement

situation in this section. Figure 3.4 shows the number of patent dispute cases received

by SIPO from 1997 to 2017, and most of the patent dispute cases are related to IP

infringement dispute cases according to the “White Papers on China's Intellectual

Property Rights Protection” published during this period. It can be noted that there were

less than 1,000 cases handled per year by SIPO during the period of 1997 to 2001,

which increased to around 1,500 per year during 2002 to 2005, after which it decreased

to about 1,000 cases per year during 2007 to 2010. There is a notable increase in 2012,

the number of patent dispute cases received by SIPO doubled from 1,286 in 2011 to

2,510 in 2012. From 2012 to 2017, the average yearly increasing rate is 68%, and the

number of patent dispute cases handled by SIPO reached 27,305 in 2017.

Figure 3.4: Number of patent dispute cases received by SIPO from 1997-2017.

Source: SIPO, (1998-2016). White Papers on China's Intellectual Property Rights

Protection, Beijing: SIPO.

0

5,000

10,000

15,000

20,000

25,000

30,000

67

Figure 3.5 presents the number of counterfeit patent cases and cases of passing off

others’ patents handled by SIPO from 1988 to 2017. The graph shows that there were

about 2,000 such cases handled by SIPO in 1998 and 1999. However, the number

decreased to around 400 in 2000 and 2001, which increased again from 2002 until 2005,

when 3,170 cases were handled by SIPO. After 2005, the number of such cases

gradually decreased and remained below 1,000 per year during the period of 2006 to

2010. The number of counterfeit cases and cases of passing off other’s patents handled

by SIPO has increased dramatically since then, there was 6,512 such cases in 2012,

which is almost 3 times as many as in 2011. From 2013 forward, the number of cases

handled by SIPO increased with an average yearly rate of 43%, and SIPO handled

38,492 cases in 2017. According to the number of patent related dispute cases received

or handled by SIPO, these two graphs suggest that there is an improvement in the

enforcement strength of SIPO to protect IP after 2001, but such improvement is limited.

The most significant improvements happened from 2012, when the number of cases

received and handled by SIPO show a sharp increase.

Figure 3.5: Number of counterfeit patent cases and cases of passing off others’ patents

handled by SIPO from 1988-2017.


Protection, Beijing: SIPO.

Figure 3.6 shows the number of trademark infringement cases investigated by SAIC

during the period of 1997 to 2016. It can be observed that the number of infringement

cases handled by SAIC is higher than the number handled by SIPO. The graph shows

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

68

that the first wave of increasing of both the total number of cases and the number of

infringement and counterfeiting cases happened during 1997-2003, after notable

increase in 2004, the number of such cases increased slowly during the period of 2005-

2010. There was a substantive increase in 2011 in the total number of cases investigated

by SAIC, from 56,034 in 2010 to 79,021 in 2011, while the number of infringement and

counterfeiting cases investigated increased from 48,548 in 2010 to 68,836 in 2011.

Different from the situation in Figures 3.4 and 3.5, the number of such cases handled by

SAIC started decreasing after 2011 and reached a number of 31,754 and 28,189 for total

number of infringement cases and number of infringement and counterfeiting cases in

2016, respectively. The number of general violation cases investigated by SAIC

fluctuated during the selected period, but the overall trend of such type of cases is

gradually decreasing from over 15,000 cases in late 1990s and early 2000 to less than

4,000 in 2015 and 2016. With regard to the number of infringement cases that involved

foreign trademark holders, the graph shows that a notable increase in the amount started

from 2004, although the data of 2000 to 2002 is missing. The figure increased from

2,130 in 2003 to 5,494 in 2004, meaning that the rate of increase was almost 160%.

Such amount of cases kept increasing from 2004 to 2008, when there was about 11,000

cases handled by SAIC that involved foreign trademark holders. After the last notable

increase in 2011 about 17,000 cases were investigated by SAIC. The amount of

infringement cases started decreasing, and there were 6,214 cases in 2016.

69

Figure 3.6: Number of trademark infringement cases investigated by SAIC from 1997-

2016.


Protection, Beijing: SIPO; Trademark Office,(2008-2017). Annual Development Report

on China’s Trademark Strategy, Beijing: China Industry & Commerce Press.

Figure 3.7 shows the total value of fines that are imposed by SAIC on trademark

infringement cases from 1997-2016, it can be noted that it follows a similar pattern of

changes as the total number of trademark infringement cases, which means that the total

value of fines per year is gradually increasing from 1997 and peaked in 2011. From then

the value started to decrease. Figure 3.8 presents the average value of fines imposed on

one trademark infringement case per year. It can be noted that the value also started to

increase gradually from 1997 to 2011 (except in 2004, when the average value of fines

declined from £665 in 2003 to £532 in 2004). However, from 2011 forward, the average

value of fines imposed on one trademark infringement case increased notable from

2012, when an average of £817 was imposed per infringement case, which increased to

£1,339 in 2016. These graphs show that both the number of cases handled and the total

amount of fines imposed by SAIC kept increasing from 1997 to 2011, and since then

the number of cases started to decrease, but the average value of fines imposed per case

kept increasing. The results suggest that the IP protection enforcement of SAIC was

gradually enhancing through the selected period, although the number of cases

investigated was decreasing after 2011, the increasing average value of fines imposed

indicates that the Trademark law enforcement is still strengthening.

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

19

97

19

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12

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13

20

14

20

15

20

16

Total

Infringement andcounterfeiting

Cases involvedforeign trademark holders

General violation

70

Figure 3.7: Total value of fines imposed by SAIC on trademark infringement cases from

1997-2016 (in million £).




Figure 3.8: Average value of fines imposed by SAIC on trademark infringement case

from 1997-2016 (in £).




0

10

20

30

40

50

60

70

0

200

400

600

800

1000

1200

1400

71

Figure 3.9 shows the number of new IPR-related civil cases of first instance accepted by

local people’s courts from 2004 to 2016. It can be noted that copyright is involved in the

largest amount of such cases, followed by trademark and then patent (except in 2004,

2005 and 2006, when there are more cases related to patent than to trademark). The

graph shows that the number of civil cases of first instance accepted for these three

types of IPR kept increasing from 2004 to 2016, and the rate of increase was higher

during the period of 2004 to 2012, after which the rate of increase slowed down. Figure

3.10 shows the number of new IPR-related civil cases of first instance concluded by

local people’s courts during 2004-2016. The total number of cases concluded follows a

similar pattern of change as shown in Figure 3.9, but it can be noted that the number of

cases involving foreign interested parties only constitutes a small proportion, which is

shown in more detail in Figure 3.11. The number of IPR-related civil cases of first

instance involving foreign interested parties (excluding Hong Kong, Macao, and

Taiwan) increased greatly from 2004 to 2009, when there were 1,361 cases concluded

by local people’s courts. From 2009 forward, the number of cases concluded per year

fluctuated, but there are no radical changes during this period.

Figure 3.9: Number of new IPR-related civil cases of first instance accepted by local

people’s courts from 2004-2016.

Source: SIPO, White Papers on China's Intellectual Property Rights Protection (1998-

2016).

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

Copyright

Trademark

Patent

72


people’s courts from 2004-2016, by the origin of interested parties.


2016).


people’s courts from 2004-2016, involving foreign interested parties (excluding Hong

Kong, Macao, and Taiwan).


2016).

Figure 3.12 presents the number of new IPR-related criminal cases of first instanced

concluded by local people’s courts from 2004-2016. It can be noted that the total

number of criminal cases (the sum of number of cases of IPR infringement, production

and sales of fake and counterfeit goods, and illegal business operations) concluded

increased slowly from 2,651 in 2004 to 3,917 in 2010. This figure then increased to

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

20

04

20

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08

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09

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10

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11

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12

20

13

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20

15

20

16

Total number ofcases concluded

Foreign

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 6

73

5,452 in 2011, and there is a tremendous increase in 2012 to 12,723 criminal cases that

were concluded that year. After that, the number of criminal cases concluded decreased

to less than 9,000 in 2013 and remained around this number during this period. The

amount of criminal cases related to IPR infringement followed a similar trend, while the

other two types of criminal cases were slightly different. The number of cases related to

producing and selling fake and counterfeit goods (involving IPR infringement) was

higher than the number of cases of IPR infringement in 2004 and 2005, the amount

decreased in 2006 and kept at less than 1,000 cases per year during 2006 to 2011, after

which it increased to over 2,000 criminal cases per year. Regarding the number of

criminal cases related to illegal business operations (involving IPR infringement), it was

consistently higher than the number of cases related to IPR infringement from 2004 to

2010. It can be noted that the number of criminal cases in this field fluctuated during

2004-2012, the average amount during this period is about 1,740 per year, while the

average amount decreased to 1,450 during the period 2013-2016.

Figure 3.13 presents the number of suspects that were sentenced in the new IPR-related

criminal cases of first instance concluded by local people’s courts in the same period.

The graph shows that the number of suspects sentenced followed the same pattern of

changes as shown in Figure 3.12, but it can be noted that there were more than 10,000

suspects sentenced each year since 2011, and the figure even reached 15,423 in 2012.

The results indicate that the number of IPR-related criminal cases concluded by local

people’s courts is gradually increasing, as well as the number of suspects sentenced in

such cases. Although the number of cases and the number of suspects sentenced have

decreased since the great increase in 2012, the amount is still higher than what it was

before 2012. We can conclude that the enforcement of protecting IPR from the aspect of

people’s court is also strengthening through time.

74

Figure 3.12: Number of new IPR-related criminal cases of first instance concluded by

local people’s courts from 2004-2016, by the types of act.


2016).

Figure 3.13: Number of suspects are sentenced in the new IPR-related criminal cases of

first instance concluded by local people’s courts from 2004-2016, by the types of act.


2016).

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

20

04

20

05

20

06

20

07

20

08

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09

20

10

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11

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12

20

13

20

14

20

15

20

16

Total

IPRs infringement

Production andsale of fake andcounterfeit goods(involving IPR infringement)

Illegal business operation(involving IPR infringement)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20

04

20

05

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06

20

07

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08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Total

IPRs infringement

Production andsale of fake andcounterfeit goods(involving IPR infringement)

Illegal business operation(involving IPR infringement)

75

To summarise the results in this section, first of all, the number of patent related dispute

cases received and handled by SIPO kept increasing, especially that the increasing

speed enhanced greatly since 2012. Second, the number of cases handled and the total

amount of fines imposed by SAIC kept increasing from 1997 to 2011, however, the

number of cases started decreasing from then, which is different from the situation for

the cases handled by SIPO. By calculating the average value of fine per case, the results

suggest that the average value of fines kept increasing. This could indicate that the

strength of enforcement is still improving, although the number of cases handled by

SAIC is decreasing. Such decline could be because the trademark infringement situation

in China has improved after years of IPR protection development. Third, among the

three types of IPR-related civil cases of first instance accepted and concluded by local

people’s court, copyright cases constitute the bigger amount of such cases, followed by

trademark and then patent (except in 2004, 2005 and 2006). The number of all three

types of IP cases kept increasing from 2004 to 2016, however, the speed slows down

after 2012. We note that the number of such cases involving foreigner(s) or foreign

enterprise(s) only constitutes a small proportion, and the amount increased greatly from

2004 to 2009. From then the number of cases concluded fluctuated with no radical

change. Regarding the number of IPR-related criminal cases concluded and the number

of suspects sentenced in such cases show that they are increasing gradually. The amount

for both number of cases and number of suspects sentenced started decreasing soon

after they peaked in 2012, however, such amounts are still higher than in the years

before 2012.

3.4.2 IP activities in China: patent application and grant, trademark registration

Having discussed the evolution of IP enforcement in China, this section examines trends

of applications/grants/registrations for patents and trademarks, distinguishing between

domestic and foreign applicants in order to assess whether in parallel to changes in IP

law and their enforcement, there has been a change in the actual use of IPR in China.

With regard to the invention patents application, Figure 3.14 shows that the number of

invention patents applied for by both domestic and foreign applicants remained at a low

level from 1995 to 2002. During this period the number of invention patents applied for

by foreign applicants is higher than the amount applied for by domestic applicants.

From 2003, the amount of invention patents applied for by domestic applicants

76

exceeded those of foreign applicants, and the gap between them has increased

dramatically since then. There were 56,769 invention patents applied for by domestic

applicants in 2003 and 48,549 invention patents applied by foreign applicants. While

the number of invention patent applied for by domestic applicants increased to around

0.2 million in 2008, the number was 95,259 for foreign applicants. In 2016, there were

1.2 million invention patents filed by domestic applicants, which is almost 9 times as

many as the number of invention patents filed by foreign applicants.

Figure 3.15 focused on the number of invention patents applied for by foreign

applicants. It can be noted that the amount of invention patents was at a low level before

2000, the rate of increase was high in 1996 and 1997 but then decreased quickly, and

the number of invention patents applied for in 1999 was even less than the amount

applied for in 1998. From 2000 to 2008, the amount increased quickly, especially from

2000 to 2005 when the rate of increase was over 20% per year. The number of invention

patents decreased in 2009, and since then there is another wave of increase. In order to

further analyse foreign applicants’ invention patent application in China, Figure 3.16

shows the number of invention patents applied for by applicants from four varied

countries and regions (Japan, South Korea, Europe, and US) which all followed a

similar trend as seen in Figure 3.15. It can still be noted that among the applicants from

these four varied countries and regions, Japanese applicants applied for the highest

number of invention patents most of the time during the period, followed by applicants

from Europe, US and South Korea, respectively.

Figure 3.14: Total number of invention patents applications from 1995-2016 in China.

Source: National Bureau of Statistics of China

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

19

95

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16

Domestic Foreign

77

Figure 3.15: Total number of invention patents applications by foreign applicants from

1995-2016 in China.


Figure 3.16: Number of invention patents applications by foreign applicants from four

different countries and regions from 1995-2016 in China.


The number of invention patents granted shows a different picture. Figure 3.17 shows

that the number of invention patents granted to foreign applicants was higher than the

number granted to domestic applicants from 1995 to 2008. The gaps between domestic

applicants and foreign applicants expanded quickly right after 2000, and the amount of

invention patents granted to foreign applicants could be 2 to 3 times as many as the

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

19

95

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2016

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

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Japan

EU

USA

South Korea

78

amount granted to domestic applicants during 2001-2004. This gap was gradually

narrowed down by domestic applicants, who finally exceeded foreign applicants from

2009 and forward. Figure 3.18 also focuses on the foreign applicants, which shows that

the number of invention patents granted remained low and gradually increasing. From

2000 to 2004, the number of invention patents granted increased quickly. There were

6,506 invention patents granted to foreign applicants in 2000, and this number increased

to 31,119 in 2004, which is almost 4 times higher. From then, the number of invention

patents granted to foreign applicants fluctuated, but the general trend was still

increasing, and the number reached 102,072 in 2016. Figure 3.19 shows the number of

invention patents granted to foreign applicants from Japan, Europe, South Korea, and

US. The graph also follows the changes shown in Figure 3.18, and the highest number

of invention patents was also granted to Japanese applicants, followed by applicants

from Europe, US, and South Korea most of the years during this period. The only

exception is that during the period of 1995 to 1999 when there are more invention

patents granted to European applicants (in 1995 and 1996, the US applicants were also

granted more invention patents than Japanese applicants), followed by applicants from

Japan, US and South Korea.

Figure 3.17: Total number of invention patents granted from 1995-2016 in China.


0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

19

95

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Domestic

Foreign

79

Figure 3.18: Total number of invention patents granted to foreign applicants from 1995-

2016 in China.


Figure 3.19: Number of invention patents granted to foreign applicants from four



The utility model patent applications and granting (as shown in Appendix A2), as well

as design patent applications and granting, both showed similar trends of change as

invention patents83. As shown in Figures 3.20 and 3.21, the number of utility model

83 For example, the notable changes all happened after 2000. Therefore, they will not be analysed in detail

in this section. Some differences also exist, for example, the number of applications and granting of these

0

20,000

40,000

60,000

80,000

100,000

120,000

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0

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10,000

15,000

20,000

25,000

30,000

35,000

40,000

Japan

EU

USA

South Korea

80

patents and design patents applied for and granted by domestic applicants is higher than

those for invention patents (except that the number of design patents applied is lower

than invention patents from 2013 to 2016). This could be because there is a lower

requirement in terms of creativity for utility model than for invention, and the reviewing

and examination process is also simpler and faster for utility model as well.

Figure 3.20: Total number of three types of patents applied by domestic applicants from

1995-2016 in China.


Figure 3.21: Total number of three types of patents granted by domestic applicants from

1995-2016 in China.


two types of patents of domestic applicants are higher than foreign applicants through the whole period of

1995-2016.

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,0001

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Utility model

Invention

Design

0

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200,000

300,000

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600,000

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1,000,000

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Utility model

Design

Invention

81

Figures 3.22 and 3.23 present the number of trademark registrations applied for by

domestic and foreign applicants from 1982 to 2017. It can be noted that the number of

applications made by domestic applicant is far higher than the number by foreign

applicants. Figure 3.22 shows that this number remained at a low-level until 1999. From

2000 to 2006, the number of trademark registration applications grows quickly, with an

average annual rate of increase of 13%. After two years’ decrease in 2007 and 2008, the

number of applications rose dramatically again, and increased from 590,525 in 2008 to

more than 5.5 million in 2017.

The graph in Figure 3.23 shows that the number of applications by foreign applicants

fluctuated but remained at a low level during the period of 1982 to 2001 with a great

increase in 1993. Since then the number of applications increased again until 2008. The

number of applications decreased in 2009, but increased again till 2011, after which it

kept at a similar level to 2014, and then increased again in 2015 and 2017.

Figure 3.22: Number of applications of trademark registration (domestic applicant) from

1982-2017.

Source: Trademark Office, 2017. Annual Development Report on China’s Trademark

Strategy 2017, Beijing: China Industry & Commerce Press.

0

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Figure 3.23: Number of applications of trademark registration (foreign applicant) from

1982-2017.

Source: Trademark Office, 2017. Annual Development Report on China’s Trademark

Strategy 2017, Beijing: China Industry & Commerce Press.

In summary, although there is no available data of patent application and granting from

early 1980s to 1994, the graphs show that the amount of invention applications and

granting for both domestic and foreign applicants remained at a low level before 2000.

The first notable increase started from 2000, and the second notable increase has

happened after 2008. The amount of invention patent applications made by and granted

to domestic applicants increased quickly, and is normally higher than the amount of

foreign applicants. However, during the period between 1995 and 2008 more invention

patents have been granted to foreign applicants. Regarding the situation of utility model

and design, the number of utility model patents and design patents applied for by and

granted to domestic applicants is higher than invention patents (except that the number

of design patents applied is lower than invention patents from 2013 to 2016). Due to the

comparatively higher requirements regarding granting invention patents, the results may

indicate that the innovation capability of China was weaker than foreign applicants

during 1995-2008. Among all the invention patents applied by and granted to foreign

applicant, Japanese inventors applied for and were granted the highest number of

invention patents during the period, followed by applicants from Europe, US, and South

Korea. Regarding the number of trademark registration applied for by domestic and

foreign applicants, domestic applicants made much more applications than foreign

applicants.

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83

The amount of trademark registration applications remained at low level during period

of 1982 to 1992, but a notable increase happened in 1993. However, the number of

applications made by domestic applicants continued to increase after 1993, but still

remained at a low level until 2000. As for foreign applicants, there were no big changes

from 1993 to 2000. After 2000, however, both domestic and foreign applications have

increased until 2008, when another wave of increases happened. In short, domestic

applicants contribute to the major part of IP activities, and they are becoming

increasingly active since 2000 especially. The dramatic increase of number of patents

applied for and granted to domestic applicants indicates that the innovation capabilities

of China are strengthening.

3.5. Discussion and Conclusion

This paper analyses the evolution of the IP system in China from IP law revisions, IP

enforcement, and innovation activities. The main contributions of this paper are

twofold: First, this study discusses the changes of IP law and enforcement over a period

of 20 years, using a novel five-dimensional assessment scheme and, in doing so, we

provide a comprehensive understanding of the Chinese IP laws and practice. Second,

our results show that the IP enforcement in China is improving significantly. Our results

show that joining WTO has provided a solid foundation for China to improve its IP

system.

Grounded on the institutional-based view, Peng and colleagues (Peng, 2013; Peng, et

al., 2017) claimed that the IPR protection in China will become better once the Chinese

economy and technology developed to a certain level in the future. However, this view

is opposed by Brander and colleagues (2017), who stated that “China has a weak

internal rule of law, a fragmented governance system, and cultural traditions that favour

collective over individual rights”. In this paper, we find agreement with Peng and

colleagues’ conclusions based on our analysis of the Chinese IP system from both

written IP laws and IP laws in practice aspects, as well as their impacts on the IP

activities in China. With regard to the quality of Chinese IP laws, we developed a five-

dimensional assessment scheme to analyse the changes that have been brought via each

amendment. Our analysis shows that the revisions made around the year 2000 for the

purpose of complying with the minimum requirements of TRIPS have brought the most

tremendous improvement to the Chinese IP laws. It not only offered opportunities for

84

China to be part of the global economy, but also established a strong foundation for the

future development of Chinese IP system. The changes made during this period also

covered almost all 5 aspects, they expanded the scope of protection by including more

objects or acts that can be protected by law, simplified the procedures related to

application, approval, re-examination and dispute solving, increased the amount of

compensation, authorised more power to both administrative and judiciary authorities

for stronger IP enforcement, and also perfected the provision related to IP rights

restrictions. The revisions made after 2008 were mainly introduced for the purpose of

improving China’s innovations ability and economy transformation, the amendments

further enhanced the quality of Chinese IP laws after analysing the revisions made on

all five aspects of both Patent law and Trademark law.

Different from scholars who claim that IPR enforcement in China is weak (Hu &

Jefferson, 2009; Greguras, 2007; Cao, 2014; Liu, 2005), our study shows that the IP

enforcement in China overall has been improving, especially after 2008. Admittedly

most of those earlier studies were conducted prior to the last IP law revisions, but this

supports the need and value of our study. As for the IP protection enforcement of

administrative authorities, the results of our descriptive data analysis show that the

number of patent related dispute cases received and handled by SIPO kept increasing,

and that the increasing rate of the amount of cases processed improved greatly since

2012 especially, four years after the third amendment of Patent law. Such increase could

be attributed to the fact that the third amendment substantially strengthened the

administrative enforcement of patent protection. At the same time, the number of cases

handled and the total amount of fines imposed by SAIC kept increasing from 1997 to

2011. However, the number of cases started decreasing from then, which could be

because trademark infringements in China have reduced after years of improvement in

IPR protection. It can be noted that the average value of fines imposed on each

trademark infringement case has been continuously increasing and the number of cases

handled by SAIC is becoming smaller, which could indicate that the enforcement is

actually become stronger.

From the perspective of judicial authorities regarding IP protection enforcement, among

the three types of IPR-related civil cases of first instance accepted and concluded by

local people’s court, the number of all three types of IP cases has increased from 2004

to 2016, although the increasing speed slows down after 2012. It is interesting to note

that the number of such cases involving foreigner or foreign enterprise constitutes only

85

a small proportion, but the amount increased greatly from 2004 to 2009. From then the

number of cases concluded has fluctuated, with no radical changes. This could be

attributed to the fact that foreign enterprises prefer not to file law suits to solve IP

related disputes, or that the IP infringement problems they encountered in China are not

as severe as stated in other reports or studies. The number of IPR-related criminal cases

concluded and the number of suspects sentenced in such cases are increasing gradually.

The number of cases and number of suspects sentenced started decreasing soon after

2012. Some scholars argue that China lacks criminal convictions for IP infringement

(Greguras, 2007; Yang, et al., 2004). However, our analysis shows that after the last

round of revisions both the number of IP-related criminal cases and the number of

suspects sentenced have increased greatly after 2008. This indicates that the criminal

convictions for IP infringement are becoming more significant.

Brander and colleagues (2017) interpret these trends as an indication that IP

infringement in China is severe. However, we hold the different view that the results

indicate that the IP protection enforcement in China is becoming stronger in both

administrative and judicial track. These results could also mean that Chinese people or

enterprises are becoming more aware of the importance of protecting IPR, and they are

becoming more used to pursue either administrative or judicial ways to protect their IP

rights, which is reflected by the number of cases handled by SIPO, SAIC, and courts.

Previous studies stated that authority overlapping and IP protection enforcement

inconsistency also exist among central government, local governments and individual

ministries (Brander, et al., 2017). However, our analysis shows a different picture. First,

the restructuring of SIPO by incorporating part of functions of the SAIC, and the

General Administration of Quality Supervision, Inspection and Quarantine shows that

the authority overlapping problem could be improved. Second, the IP law revisions

regarding enforcement mechanism aspect show that different power granted to

administrative authorities and judicial authorities is becoming increasingly clear via

each revision, which is different from what Brander and colleagues claimed (Brander, et

al., 2017). It has also been affirmed that the important position of people’s court

regarding making the final decision of the decisions made by the administrative

authorities. Third, researchers posit that the IP protection enforcement inconsistency

between central and local governments is attributed by different priorities for local

governments, which may have little concern regarding IP infringement for protecting

local industries (Brander, et al., 2017). Studies found that areas with better economy

86

development such as Beijing, Shanghai and Guangzhou have better IPR protection

(Berrell & Wrathall, 2006). It can be assumed that such inconsistency is due to the

economic development level in China not being even among different regions, once the

economy in all areas developed to a certain level, the situation of IP enforcement

inconsistency will be reduced.

Some researchers have claimed that Chinese people are culturally conditioned to engage

in a high level of IPR violation (Zimmerman, 2013). The case of Taiwan, where it is

argued that IPR protection is not a concern but shares similar culture as mainland China,

could indicate that culture’s influence on IPR violation can be changed. This is further

supported by the fast development of the digital music industry in China, which

previously had severe piracy problems (Swike, et al., 2008). It can be noted that the fees

digital music users paid to the online music platform increased from £16.48 million in

2012 to £206 million in 2016 (iResearch, 2018).

Patent law and Trademark/Copyright law not only cover different aspects of IP rights,

but also protect different phases of the innovation process and activities, i.e., Patent law

protects innovations/inventions from early innovative/inventive stage,

Trademark/Copyright law mainly protect trademark/creator’s work (e.g., music,

painting, book, website) in the commercialisation and diffusion stage. After reviewing

the changes that have been made to the Chinese IP system, it can be claimed that China

has taken a holistic approach in developing its innovative environment by enhancing IP

protection from the inception of innovation to commercialisation.

The analysis of IP activities in China shows that they share a similar development

pattern to the IP laws development in China. This indicates that the number of patent

applications and granted, and the number of applications of trademark registration all

remained at a low level before 2000, when a radical change/development started, which

further increased after 2008. In particular, the number of invention patents granted to

domestic inventors finally exceeded the foreign applicants in 2008, and keeps at a sharp

increase since then. It can be assumed that as a consequence of openness to global trade

and membership of WTO to comply with TRIPS, coevolution of formal (law) and

informal (culture, people’s perception of IP) institutions result in a dramatic increase in

innovation activities in China, especially by domestic innovators.

Our findings show that the IP laws and their enforcement have been greatly enhanced,

especially since 2000. Defects in Chinese IP system that have been discussed in

87

previous studies are being addressed, for example, authority overlapping, IP protection

enforcement inconsistency, and the influences Chinese culture have on people’s opinion

of IPR. However, the IP system in China needs to be further improved to perfect the IP

laws and further strengthening the IP enforcement. We understand that new revisions of

both Patent law and Copyright law are currently under discussion. This suggests that the

Chinese government has a strong willingness to improve its IP system further.

In conclusion, our findings provide the basis to investigate how those changes in IP

laws and enforcement impacted upon and coevolved with the technological and

economic development in China, including the innovation and activities of foreign

companies.

88

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Appendix A1 A brief summary of the key aspects of IP law have been revised

Table A1: A brief summary of the key aspects of IP law have been revised

Patent law Trademark law Copyright law

~1990s The main aspects of patent law revised in 1992 generally meet requirements of the Memorandum

of Understanding on The Protection of Intellectual Property (i.e., to include chemical inventions

as patentable subject matters, and provided requirements regarding term of protection,

compulsory licenses and rights conferred which should be included in patent law)

• Expanded patentable subject matter by including “Food, beverage and condiment; Drugs and

substances obtained by chemical means”

• Extended the duration of patent protection from 15 to 20 years for invention patents, and the

duration of utility model patent and design patent was extended from 5 to 10 years

• Strengthened the patent rights protection by: (1) extended the protection of patented method

by including “use, sell the products that are developed directly through the use of the patented

method” instead of “using this method”; (2) granted a new right to the patentee that he/it can

“prevent others from importing the patented products or products that are developed directly

through the use of the patented method after the patent right is granted, unless otherwise

provided for in this Law”; (3) Changed the conditions for compulsory licensing for

exploitation of a patent so that first of all, the unit that request for exploitation of an invention

patent or utility model patent need to have reasonable terms. Secondly, instead of requiring

the patentee to produce the patented product or use patented method within 3 years, the unit

should request the patentee first but not granted the right within reasonable time. Thirdly, the

amendment also provides that the patent office may grant a compulsory license for

exploitation of an invention patent or utility model patent if a national emergency or any

extraordinary state of affairs occurs, or public interests so require. The revised provisions put

more restriction on the administrative department to grant a compulsory license for

exploitation of a patent.; (4) Added a provision that is related to punishment of counterfeits.

Article 63 of the 1992 amendment provides that the patent administration department shall

order the suspension of counterfeiting the patented product or the patented method, making

public corrections as ordered, and impose a fine.

• Perfected the procedure provision of patent application, examination and approval of patent

application, e.g., added that the foreign applicant enjoys the same right of priority as the

Chinese applicant; Further clarified the scope of patent application documents that can be

modified; The 1992 amendment added more detailed provisions that are related to declaring a

patent right invalid; The time limit for revoking a patent right changed from “within three

months since the date the patent office announces the patent application” to “within six

months since the date that the patent office announced the grant of patent right”.

Yang and Clarke (2005) stated that the 1993 amendment of Trademark law in

China is based on the Madrid Agreement.

• Included service trademarks in the law in addition to trademarks for goods.

• Perfect the procedures for Trademark Registration, which include (1) Added

“geographical names of an administrative division at or above the county

level and the foreign geographical names which are well known to the

public” to be the signs that can not be used as trademarks. (2) Simplified the

procedure “Where same applicant for registration of a trademark intends to

use the same trademark for goods in different classes” by only filing an

application for registration in respect of each class of the prescribed

classification of goods, but not filing the applications in respect of different

classes of goods. (3) Added a new provision in article 27 which provides

that the trademark office shall cancel the registered trademark if “the

registration of a trademark was acquired by fraud or any other unfair

means”.

• Strengthened the protection of trademarks by enlarging the scope of acts

that shall be considered infringement of registered trademarks. The 1993

amendment enlarged the scope of acts that shall be considered infringement

of registered trademarks by adding “sell goods that he knows bear a

counterfeited registered trademark” and “to counterfeit and to sell such

representations of a registered trademark as were counterfeited”. The

amendment also made more detailed provisions regarding counterfeiting a

registered trademark by dividing it into three different types of acts, which

include “counterfeit a registered trademark of another person”,

“counterfeits, or makes representations of a registered trademark of another

person without his/its authorization, or sells such representations of a

registered trademark as were counterfeited, or made without authorization”,

and “sells goods that he knows bear a counterfeited registered trademark”.

In addition, the 1993 amendment specified that when the case is serious

enough to constitute a crime, the party shall be prosecuted according to the

law.

The Copyright law was first

enacted in 1990, so the first wave

of revision only involved Patent

law and Trademark Law

93


~2000s Compared with the 1992 amendment of Patent law, the

2000 amendment involved changes of 35 provisions.

• The purpose of enacting patent law is clearly defined as

for promoting the advancement of science and

technology, as well as innovation. For achieving such

purpose, the 2000 amendment revised some provisions

which aims to encourage scientific and technological

personnel for technical innovation. For example, article

6 provides that “For an invention-creation that is

accomplished by using the material and technical

conditions of an employer, if the employer has

concluded a contract with the inventor or designer

providing the ownership of the right to apply for the

patent or the ownership of the patent right, such

provision shall prevail”. Article 16 also clearly provides

that “the inventor or designer shall be given a

reasonable amount of remuneration according to the

scope of application and the economic results after the

patent is exploited”.

• Strengthened the protection of IP by revising the Patent

law in accordance to the requirement of TRIPS. The

changes made to Patent law include: (1) The 2000

amendment include “offer to sell the patented

production or the products that are developed directly

through the use of patented method” to be one type of

the acts that a patentee can prohibit others to exploit the

patent without his/its permission. This enlarged the

scope of patent rights protection. (2) Added a provision

to protect the bona fides third party from considering

his/its act as infringement. Article 63 provides that if

anyone “uses, or sells a patented product without

knowing that such product is produced and sold without

permission of the patentee, or such product is directly

obtained by using the patented method, he shall not be

liable for compensation provided that the legitimate

source of the product can be proved”. (3) Added pre-

litigation provisional measures that a patentee can take

to protect his/its rights. Article 61 provides that

“patentee or interested party can file an application to

request that the People's court order to have patent

infringement act ceased and take preservation measures

if he/it has evidence to prove that another person is

The 2001 amendment of Trademark law revised 23 articles of the

1993 Trademark law and added another 23 articles:

• The 2001 amendment enlarged the scope of applicants by

granting a “natural person” the right to apply for trademark

registration, as well as adding a situation where more than one

applicant can “jointly file an application for the registration for

the same trademark, and jointly enjoy and exercise the

exclusive right to use the trademark”.

• Expanded the types of visual signs that can be registered as

trademarks and the types of trademarks. Firstly, the scope of

visual signs that can be registered as trademarks enlarged from

“word, design or their combination” to “word, design, letters

of an alphabet, numerals, three-dimensional symbol,

combinations of colours, and their combination”. Secondly, in

addition to trademarks for goods and services, the revision also

includes collective trademarks and certification trademarks to

be the ones that have been approved and registered by the

Trademark Office. The 2001 amendment also added a

provision regarding specific requirements needed to be met if

geographic indication is contained in trademark, which means

“the goods is not from the region indicated in the geographic

indication in a trademark and it misleads the public, it shall be

rejected for registration and prohibited from use, unless the

trademark has been registered in good faith”. Thirdly,

modified the types of signs that cannot be used as trademarks,

for example, the 2001 amendment added “names of the places

where the Central and State organs are located, or with the

names and designs of landmark buildings” shall not be used as

trademarks. Fourthly, the new amendment added several types

of signs that shall not be registered as trademarks, such as

“those having direct reference to the quality, main raw

materials, function, use, weight, quantity or other features of

the goods in respect of which the trademarks are used”, and

“those only comprising generic names, designs or models of

the goods in respect of which the trademarks are used”.

• Added provisions to protect “well-known trademarks”. The

2001 Trademark law not only defined several factors that can

be used to evaluate whether a trademark shall be considered as

well-known trademark, but also provided special protection for

well-known trademarks by providing that “a trademark used

for identical or similar goods is a reproduction, imitation or

translation of another person's well-known trademark, if this

The Copyright law enacted in 1990 has 56 articles, and the first amendment of

Copyright law has 60 articles, among which 53 are modified or added.

• Redefined the protection content and scope in the Copyright law. The changes

made in this category mainly constitute 4 parts: (1) Expanded the objects of

copyright protection by including “acrobatic works, architecture, works created by

virtue of an analogous method of film production, model works, and a work that is

created by compilation of several works, parts of works, data that do not constitute

a work or other materials and having originality in the selection or arrangement of

its contents”. (2) Narrow down the scope of reasonable use of copyright. For

example, the condition to “reuse or cite a published work in newspapers,

periodicals, at radio stations, television stations or any other media for the purpose

of reporting current events” but without permission from and without payment of

remuneration to the copyright owner has to be “unavoidable”. If a state organ

needs to use a published work for the purpose of fulfilling its official duties but

without permission from and without payment of remuneration to the copyright

owner, the work can only be used “within proper scope”. Article 43 in the 2001

amendment provides that “a radio station or television station that broadcasts a

published sound recording”, does not need a permission from, but shall pay

remuneration to, the copyright owner, except if the parties of interest have agreed

otherwise”. However, in the 1990 Copyright law, as long as it is used for non-

commercial purposes by a radio station or television station, neither permission

nor paying remuneration to the copyright owner is required. (3) Greatly revised the

“legal license system”. The 2000 amendment revised several occasions that do not

need the permission from the copyright owner. For example, article 23 provides

that “in compiling and publishing textbooks for implementing the nine-year

compulsory education and the national educational program, parts of published

works, short written works, music works or single copies of works of painting or

photographic works may be compiled into textbooks without the authorization

from the authors, except where the authors have declared in advance the use

thereof is not permitted”. Cancelled the provision that “a performer (an individual

performer or a performing troupe) who for a performance exploits an unpublished

work created by others shall obtain permission from the copyright owner”. The

condition for a producer of a sound recording who is exploiting another person’s

music work for producing sound recordings does not need to obtain permission

from the copyright owner changed from the music work is “a published work

created by others” to “a music work another person has duly made into a sound

recording”. (4) Specified the copyright in the internet environment. Article 10

specified that “the right of communication of information on networks, that is, the

right to communicate to the public a work, by wire or wireless means in such a

way that members of the public may access these works from a place and at a time

individually chosen by them” can be enjoyed by the copyright owner. Article 37

added that the performer enjoys the right “to authorize others to communicate his

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committing or is about to commit a patent infringement

which may cause irreparable harm to his lawful rights

and interests unless being ceased in time”. (4) The

amendment provides that an application for a patent for

utility model or design or a patent reexamination or

invalidation shall finally be examined by the court,

while such final decisions in the 1992 amendment are

made by the Patent review board.

• Modified the conditions for granting a compulsory

license. For example, article 51 provides that the

exploitation of an invention or utility model which has

been obtained the patent right relies on an earlier

invention or utility model which also has obtained the

patent right, the condition for granting a compulsory

license to exploit the earlier invention or utility model is

that the later invention or utility model “represents a

major technological advancement of remarkable

economic significance” in the 2000 amendment, while

the 1992 amendment only requires it to have

“technological advancement”. Article 52 added a

provision which specifies that the “decision on granting

of the compulsory license shall be specified the scope

and duration for exploitation according to the reasons

justifying the compulsory license”, and also added a

situation “when such reasons cease to exist and are

unlikely to recur”, to what actions a patentee can take so

that his/its patent rights can be protected

• Clarified, simplified, and perfected the procedures

regarding examination and approval of patent

applications, as well as patent protection and

punishment. First of all, the amendment clarified the

way to calculate the amount of compensation by

providing that it “shall be determined according to the

patentee's losses caused by the infringement, or

according to the benefits acquired by the infringer

through the infringement. If it is hard to determine the,

the amount of compensation may be determined

according to the reasonably multiplied amount of the

royalties of that patent”. Secondly, the 2000 amendment

delete all the provisions related to revoking patent

rights, and only kept the provisions related to declaring

a patent right invalid. Since there are many overlaps

between the procedure of revoking patent rights and

well-known trademark not registered in China, the trademark

shall be rejected for registration and prohibited from use if it is

likely to cause confusion. While if this well-known trademark

has been registered in China, and it is likely to mislead the

public, it shall be rejected for registration and prohibited from

use as well”. Furthermore, other trademarks can only file a

request with the Trademark Review and Adjudication Board

for adjudication to cancel the registered trademark within five

years from the date of the registration of the trademark if it

shall not be registered in accordance with the provision.

However, if a well-known trademark is registered in bad faith,

the genuine owner can file such request but without the

restriction of a five-year limitation.

• The new amendment perfects the procedures that are related to

application of trademark registration and assignment of

registered trademarks, as well as the procedures related to

requiring the Trademark Review and Adjudication Board for

adjudication of trademarks with disputes. First of all, the 2001

Trademark law added 2 articles which are related to the right

of priority for registering a trademark in China by providing

the requirements and procedures of obtaining the right of

priority. For example, Article 24 provides that “any applicant

for the registration of a trademark who files an application for

registration of the same trademark for identical goods in China

within six months from the date of filing the first application

for the trademark registration overseas may enjoy the right of

priority in accordance with any bilateral agreement, or

international treaties both countries joined”, and “Anyone

claiming the right of priority shall make a statement in writing

when it or he files the application for the trademark

registration, and submit a copy of the application documents it

or he first filed for the registration of the trademark within

three months”. Secondly, the 2001 amendment made specific

requirement that “the assignor and assignee shall conclude a

contract for the assignment of a registered trademark” when

“jointly file an application with the trademark Office regarding

trademark assignment”. Thirdly, if any person disputing a

registered trademark can apply to the Trademark Review and

Adjudication Board for adjudication, the time limit for filing

such application extended from one year to five years in the

2001 amendment. As stated in the previous paragraph, the

2001 amendment added provisions regarding requesting

performance to the public on information network, and to receive remuneration

therefore.” Article 41 also provides that a producer of sound recordings or video

recordings have the right to authorize others to “communicate to the public on an

information network”

• The 2001 Copyright law redefined the types of copyrights that can be enjoyed by a

copyright owner or other relevant parties. The revisions mainly include: (1) New

types of personality rights and property rights included in copyrights include: the

right of rental, the right of showing, and the right of communication of information

on networks. It also expanded the types of acts that right owners can use to

exercise their right of performance and the right of broadcast. (2) The 2001

amendment added a requirement that a producer of sound recordings or video

recording shall obtain permission from “the owner of the copyright in the work

created by adaptation, translation, annotation or arrangement and to the owner of

the copyright in the original work” for exploiting its/his work. “When publishing

works created by adaptation, translation, annotation, arrangement or compilation

of pre-existing works, the publisher shall both have the permission from the

owners of the copyright in the works created by means of adaptation, translation,

annotation, arrangement or compilation and the owners of the copyright in the

original works” as well. (3) Modified and strengthened the rights of the owner of

“neighbouring rights ” can enjoy. First of all, the 2001 amendment added that “a

publisher has the right to license or prohibit any other person to use the

typographical arrangement of books or periodicals he has published, the term of

protection for such right is 10 years”. Secondly, revised the types of rights that a

performer can enjoy, for example, modified the right “to authorize others to make

live broadcasts” to “to authorize others to make live broadcasts and public

transmission of its or his performance and to receive remuneration”. Revoked the

requirement of “for commercial purposes” for “to authorize others to make sound

recordings and video recordings, and to receive remuneration therefore”. The new

amendment also added two more types of right that a performer can enjoy, which

include “to authorize others to reproduce or distribute sound recordings and video

recordings incorporating his performance, and to receive remuneration therefore”

and “to authorize others to communicate his performance to the public on

information network, and to receive remuneration therefore”. The term of

protection for the related rights is 50 years. Thirdly, the types of rights a producer

of sound recordings or video recordings can enjoy expanded from “to authorize

others to reproduce“ to “reproduce, distribute, rent and communicate to the public

on an information network”. “The term of protection of such rights expires on 31st

December of the fiftieth year after the recording was first produced” instead of

published for the first time as provided in 1990. Finally, the 2001 amendment

provided new types of acts that can be prohibited by a radio station or television

station, which include “to rebroadcast its broadcast radio or television program,

and to fix its broadcast radio or television program on a sound recording or video

recording carrier and to reproduce the sound recording or video recording carrier.”

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declaring a patent right invalid, this change is believed

to simplify the procedure and greatly improve the

effectiveness of law enforcement (Wen, 2000). Thirdly,

the 2000 amendment simplified the procedures for

Chinese unit or individual to apply for patent in a

foreign country, and the procedures to transfer a patent

right. For example, Article 20 provides that when a

Chinese unit or individual that intends to apply for

patent in a foreign country for an invention

accomplished in China, one of the conditions changed

from being approved by the relevant department under

the State Council to just apply for a patent right from

the patent administration department under the State

Council first. Fourthly, the 2000 amendment perfect the

procedures of declaring a patent invalid and protecting

patent rights. For example, Article 46 added “the

opposite party in the invalidation procedure to

participate in the litigation as a third party” when “a

person that is dissatisfied with the patent review board's

decision” and took legal action. Article 57 provides that

“the patent infringement dispute “shall be settled

through consultation between the parties”, and added

that “The administration department for patent-related

work that handles the call shall, upon request of the

parties, carry out mediation concerning the amount of

compensation for the patent right infringement. If

mediation fails, the parties may take legal action”.

Article 57 section 2 provides that for different types of

patents, the evidence that needs to be provided for

solving a patent infringement dispute is also different:

an invention patent for the method of manufacturing a

new product, the unit or individual manufacturing the

same product shall provide evidence to show that the

manufacturing method of their own product is different

from the patented method; For a utility model patent, a

patent right search report prepared by the patent

administration department under the State Council may

need to be presented. Article 62 also specified that “the

period of limitation for taking legal action by the

patentee for requesting payment of royalties shall be

two years”.

• Clearly defined the job functions of the IP related

administrative departments, and also specified the

adjudication to cancel the registered trademark that should not

be registered.

• Established a judicial review system for reviewing the decision

or adjudications made by the administrative departments. The

2001 amendment delete all the provisions that the Trademark

Review and Adjudication Board makes the final decision or

adjudication regarding application for trademark registration,

examination and approval of trademark registration, or

cancelling a registered trademark. Instead, if an applicant or

any interested party is not satisfied with the decisions made by

the administrative departments, he/it can institute legal

proceedings in the People’s court within thirty days from the

date of receipt of the notice.

• The 2001 amendment add several provisions to strengthen the

protection of trademark right. Firstly, the new amendment

assigned certain power to the administrative authority for

industry and commerce to protect the trademark right, stop and

punish trademark infringement. For example, if the trademark

right is infringed, in addition to order the infringer to

immediately stop the infringing act and impose a fine which

are included in the 1993 Trademark law, the new types of

actions that the administrative authority for industry and

commerce can take include “confiscate and destroy the

infringing goods and tools specially used for the manufacture

of the infringing goods and for counterfeiting the

representations of the registered trademark” in the 2001

Trademark law. The 2001 amendment also gives the

administrative authority for industry and commerce the right to

“handle the matter upon the request of the interested party by

medicating on the amount of compensation for the

infringement of the exclusive right to use the trademark; where

the medication fails, the interested party may institute legal

proceedings in the People's Court”. Secondly, the newly added

articles 57 and 58 are related to “property preservation before

litigation” and “evidence preservation”. Article 57 provides

that a trademark registrant or interested parts may file an

application with the People's Court to take measures for

property preservation before litigation if he/it has evidence to

show that another person is committing or will commit an

infringement of the right to use its or his registered trademark,

and irreparable damages will be caused if failing to stop the

infringement. Article 58 provides that “In order to stop an

infringing act, any trademark registrant or interested party may

(4) Changed the rights that shall be enjoyed by the owner of a cinematographic

work. The 2000 Copyright law specified that “the scriptwriter, director,

cameraman, lyricist, composer, and other authors thereof shall enjoy the right of

authorship in the work, and have the right to receive remuneration pursuant to the

contract concluded with the producer”, while “the copyright of a cinematographic

work and any work created by an analogous method of film production shall be

enjoyed by the producer”. (5) The new amendment requires that assignment of a

copyright shall conclude a contract in writing, and specifies the basic clauses

should be include in the contract. The 2001 Copyright law also revoked the

provision that “the term of validity of a contract shall not exceed 10 years”.

• Several provisions are modified so that the copyright protection by judiciary

authorities can be further strengthened. The revisions include: (1) Article 46 adds

new types of infringement acts that should bear civil liability, which include

“plagiarizing a work of another person”, “exploiting the typographic arrangement

of a book or periodical without the permission of the publisher”, “rending a work,

sound recording or video recording, without the permission of the copyright owner

of a cinematographic work, a work created by virtue of an analogous method of

film production, computer software, sound recording or video recording or the

owner of a copyright-related right unless otherwise provided in this Law”, and

“communicating the live performance to the public and recording his performance

without the permission of the performer”. (2) Article 47 adds new types of

infringement acts that should bear civil liability, and in some circumstances, it may

bear administrative penalties, or the infringer may be prosecuted if the act

constitutes a crime. The new types of acts include “distributing, performing,

showing, broadcasting, compiling or communicating to the public on an

information network a work created by another person, without the permission of

the copyright owner”, “reproducing and distributing a sound recording or video

recording of a performance, or communicating to the public his performance on an

information network”, “intentionally circumventing or destroying the

technological measures taken by a right holder for protecting the copyright or

copyright-related rights in his work, sound recording or video recording, without

the permission of the copyright owner, or the owner of the copyright-related rights,

unless otherwise provided in law or in administrative regulations”, and

“intentionally deleting or altering the electronic right management information of a

work, sound recording or video recording, without the permission of the copyright

owner or the owner of a copyright-related right, unless otherwise provided in law

or in administrative regulations”. (3) Strengthened the enforcement of Copyright

law of judiciary authorities. The 2001 Copyright law provides that “the People's

Court hearing a case may confiscate the unlawful income, infringing reproductions

and materials used for committing the illegal act of infringement of copyright or

copyright-related rights.” (4) Added new articles regarding specific measures that

the People’s Court could take to protect the rights of copyright owner. These

measures include “ordering cessation of the related act and for taking the measures

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obligations of the relevant administration department.

For example, Article 2 specially stated that “the

departments in charge of patent-related work of the

people's governments of provinces, autonomous regions

and municipalities directly under the Central

Government shall be responsible for patent

administration within their respective administrative

areas”. Article 21 requires that the patent administration

department under the State Council and its Patent

Review Board shall handle patent applications and

requests objectively, fairly, accurately and timely.

Articles 66 specified that “the administration

department for patent-related work shall not be involved

in recommending patented products to the public or

engage in any other similar business activities”,

otherwise, it will receive certain punishment.

Furthermore, article 67 expanded the types of acts of

staff member of the government department engaged in

administration of patent-related work can constitutes a

crime, in addition to committing irregularities for

personal gain, neglects his duty and abuses his power

are the ones newly added in the amendment.

file an application with the People's Court for evidence

preservation before instituting legal proceedings where the

evidence will possibly be destroyed or lost or difficult to be

obtained again in the future”. Thirdly, the 2001 amendment

increased the amount of compensation. The 2001 Trademark

law not only added “the appropriate expenses that infringee for

stopping the infringement” to be part of the compensation, but

also confirmed that “the People's Court shall impose an

amount of damages of no more than RMB 500, 000 yuan

according to the circumstances of the infringement if it is

difficult to determine the profit that the infringer has earned or

the injury that the infringee has suffered”.

• Added the obligations of the staff member who works in

relevant administrative departments. For example, article 60

provides that “The State functionaries for the registration,

administration and reexamination of trademarks must handle

cases according to law, be incorruptible and disciplined,

devoted to their duties and courteous and honest in their

provision of service.” Article 62 provides that “Where any

State functionary for the registration, administration and

reexamination of trademarks neglects his duty, abuses his

power, engages in malpractice for personal gain, handles the

registration, administration and reexamination of trademarks in

violation of law, accepts money or material wealth from any

interested party or seeks illicit interest, which constitutes a

crime, he or she shall be prosecuted for his or her criminal

liability. If the case is not serious enough to constitute a crime,

he or she shall be given disciplinary sanction according to

law.”

for property preservation before instituting legal proceedings if copyright owner or

owner of a copyright-related right who has evidence to establish that another

person is committing or will commit an act of infringing his right, which could

cause irreparable injury to his legitimate rights and interests if the act is not

stopped immediately”, and preserve evidence before initiating legal proceedings if

the evidence could be lost or are difficult to obtain afterwards for the purpose of

preventing an infringing act”. Furthermore, the amendment also specifies that the

court should make a decision within 48 hours. (5) Clarified how to calculate and

decide the amount of compensation. Articles 48 provides the amount of

compensation shall be “the actual injury suffered by the right holder, where the

actual injury is difficult to compute, the damages shall be paid on the basis of the

unlawful income of the infringer. The amount of damages shall also include the

appropriate fees paid by the right holder to stop the infringing act”. It also specifies

that if “the right holder's actual injury or infringer's Unlawful income cannot be

determined, the People's Court shall Judge the damages not exceeding RMB 500,

000 depending on the circumstances of the infringing act”. (6) Added a new article

which provides that the publisher or producer of a reproduction, the distributor of a

reproduction, and the renter of the reproduction of a cinematographic work has the

obligation to provide evidence to prove that his/its distributed or rented

reproduction has been from a lawful source.

• The strength of copyright protection provided by the relevant administrative

departments is enhanced. The new amendment not only clearly defined the legal

status of the organisation for collective administration of copyright, but also

expanded the administrative penalties that the copyright administration department

may impose to deal with the infringement. Article 47 provides that if the

infringement is harming the public interest at the same time, “a copyright

administration department may order to cease the infringing act, confiscate

unlawful income from the act, confiscate and destroy infringing reproductions and

impose a fine. where the circumstances are serious, the copyright administration

department may also confiscate the materials, tools, and equipment mainly used

for making the infringing reproductions”.

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2008- The amendment this time was enacted mainly for China’s own goal of improving its

innovation ability by enhancing the level of IP protection (Li & Yu, 2015; Yang &

Yen, 2009). The 2008 amendment modified 36 articles:

• In order to encourage patent applications in China, the 2008 amendment not

only modified the provision so that both a Chinese unit or individual and “a

foreigner, foreign enterprise, or other foreign organisation without a regular

residence or business site in China” are treated equally when it/he intends to

apply for a patent in China, but also removed the requirement that a Chinese unit

or individual shall apply for a patent right to the patent administration

department under the State Council first if it/he intends to apply for a patent in a

foreign country for an invention accomplished in China. In addition, the 2008

amendment also revoked the requirement that the patent shall be approved by

the relevant competent department under the State Council if a Chinese unit or

individual intends to transfer the right to apply for a patent or patent rights to a

foreigner. Article 10 provides that a Chinese unit or individual can transfer such

right not only to a foreigner, but also to a foreign enterprise or other foreign

organisation. The procedure of transferring a patent only needs to be performed

in accordance with the provisions of relevant laws and administrative

regulations. Furthermore, the 2008 revision also added provisions regarding co-

owners of patent application rights or patent rights, which is believed to give

more freedom to relevant parities (Guo, 2009).

• The 2008 amendment raised the standards for patent applications. Firstly, the

novelty requirement for patentability is raised from a “relative novelty” standard

to an “absolute novelty” standard. The 2008 Patent law added that the invention

or utility model is not an existing technology for invention or utility model to

the requirement of novelty in addition to “no patent application is filed by any

unit or individual for any identical invention or utility model with the patent

administration department under the State Council before the date of application

for patent right, and no identical invention or utility model is recorded in the

patent application documents or the patent documentations which are published

or announced after the date of application”, which was the only requirement in

the 2000 Patent law. Secondly, the requirement of “creativity” is also changed.

Instead of comparing with technologies available before the date of application,

the 2008 Patent law provides that it should be compared with the existing

technologies. Thirdly, the requirements for granting a patent right to a design are

also raised. The 2008 amendment specifies that the design should not be an

existing design, and no application should be filed before the date of application.

There should be distinct differences between the existing designs or the

combinations of the features of existing designs and the design intends to apply

for patent rights as well. However, the 2000 Trademark law only requires that

the design should be different or dissimilar from the design which was published

The 2013 amendment of Trademark law modified 53 articles of the 2001 Trademark law,

and the total number of articles increased from 64 to 73.

• The revisions are for the purpose of providing convenience when applying for a

trademark registration. (1) Regarding the types of signs that can be registered as

trademarks by including “sound” to be one of the signs that can be registered. (2) Clearly

provided that “a trademark registration applicant may apply for registration of the same

trademark for multiple types of goods in one application”, this article also added that “a

trademark registration application and other relevant documents may be submitted in

writing or by way of data message” due to the development of internet. (3) Authorised

the trademark office the power to require the applicant to explain or correct the contents

of the trademark registration application during the interview. (4) Perfect the provisions

regarding raising objection of the trademark registration. The 2013 amendment refined

the person/unit who has the right to file an opposition, and which provisions can be used

as the references when he/it files the opposition. The 2013 amendment also simplified the

process of dealing with the objection filed by a holder of prior rights or an interested

party of a trademark. Instead of making an adjudication, the 2013 amendment only

requires the trademark office to make a decision on whether or not to approve the

registration of the trademark. If the trademark office decides to approve a trademark

registration but the opponent is dissatisfied with the decision, he may request the

trademark review and adjudication board to declare the registered trademark invalid.

However, if the trademark office decides not to approve a trademark registration and the

opposed party disagreeing to the decision may apply for a second review to the trademark

review and adjudication board. (5) New provisions are added regarding the time limit for

trademark examination. For example, the trademark office is required to complete the

examination of a trademark within nine months from the date of receiving the application

documents for trademark registration. The trademark review and adjudication board shall

make a decision and notify the party concerned in writing within nine months upon the

receipt of the application for review (an extension of three months may be granted upon

approval by the administrative department for industry and commerce of the State

Council), if a party is dissatisfied with the decision made by the trademark office. The

trademark review and adjudication board shall render a ruling on either maintaining the

validity of the registered trademark or declaring the registered trademark invalid within

12 months upon the receipt of the application for declaring the registered trademark

invalid, and notify the party concerned as such in writing (an extension of six months

may be granted upon approval by the administrative department for industry and

commerce of the State Council). (6) Modified the types of signs that cannot be used as

trademarks. The 2013 amendment includes “the national anthem, the military emblem or

songs, the names or emblems of Central State organs” to the signs that cannot be used as

trademarks, and it specified that the signs that are likely to mislead the public in terms of

the quality, place of production or other characteristics of the goods also cannot be used

as trademarks.

Different from the massive

revisions that have been done to

Patent law and Trademark law,

there are only two articles of

Copyright that are revised in 2010.

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in the domestic or foreign publications or publicly used domestically before the

date of application.

• Restrictions have been put on the patent right in 2008 amendment, which

provides that only one patent can be granted for the same invention. More

importantly, the 2008 Patent law add provisions of generic resources by

providing that “Patent rights shall not be granted for inventions that are

accomplished by relying on genetic resources which are obtained or used in

violation of the provisions of laws and administrative regulations” in article 5.

Article 26 specifies that “the patent application documents shall indicate the

direct and original source of the genetic resources if the invention-creation

accomplished by relying on genetic resources”.

• Enlarged the scope of patent protection by adding “offer to sell” to be the type

of acts which requires permission of the patentee if a unit or individual intends

to exploit a design patent.

• Strengthening patent protection is one of the aspects that the 2008 amendment

focused on. The revisions of this aspect are constituted by perfecting provisions

of compulsory licence, revising the situations that are not considered as

infringement, perfecting the provisions regarding compensation for

infringement, and specifying special measures that can be taken to protect patent

rights. (1) Perfect provision of compulsory licence. Article 48 in the 2008

amendment specifies the circumstances under which a compulsory license for

exploitation of an invention patent or utility model patent can be granted, which

are “a. When it has been three years since the date the patent right is granted and

four years since the date the patent application is submitted, the patentee,

without legitimate reasons, fails to have the patent exploited or fully exploited;

or b. The patentee's exercise of the patent right is in accordance with law,

confirmed as monopoly and its negative impact on competition needs to be

eliminated or reduced”. The requirements are vague in the 2000 Patent law. The

newly-added article 50 provides that a compulsory license for manufacturing a

drug which is protected by patent rights can be granted for the benefit of public

health, and article 52 provides that “if an invention involved in a compulsory

license is a semi-conductor technology, the exploitation thereof shall be limited

to the purpose of public interests and to the circumstances listed in article 48”.

(2) Revised the situations which are not considered infringement. The 2008

amendment added that “if the accused infringer has evidence to prove that the

technology or design exploited is an existing technology or design”, and “any

person produces, uses, or imports patented drugs or patented medical apparatus

and instruments, for the purpose of providing information required for

administrative examination and approval, or produces or any other person

imports patented drugs or patented medical apparatus and instruments especially

for that person”, will not be deemed to be patent right infringement. The 2008

amendment also specifies that “for the purpose of production and business

operation, offers to sell a patent-infringing product without knowing that such

• The provisions are modified for maintaining a good market order of fair competition, (1)

Established that “good faith” should be the fundamental principle that should be upheld

in the application for trademark registration and in the use of trademarks. (2) The 2013

Trademark law perfect the rules to protect well-known trademark by providing that “a

well-known trademark shall be recognized as a fact that needs to be ascertained in

dealing with a trademark-related case upon request by the party concerned”, and also

specifies that according to the claims of the party, relevant authorities can decide whether

or not to recognise the relevant trademark as a well-known one under varied

circumstances (e.g., during the trademark registration review, or handling of a trademark

dispute, or the hearing of a civil or administrative case). (3) Strengthened the protection

of unregistered trademarks by adding a new paragraph to article 15 that provides that “an

application for registering a trademark for the same kind of goods, or similar goods shall

not be approved if the trademark under application is identical with or similar to an

unregistered trademark already used by another party, the applicant is clearly aware of

the existence of the trademark of such another party due to contractual, business or other

relationships with the latter other than those prescribed in the preceding paragraph, and

such another party raises objections to the trademark registration application in question”.

(4) Specified a situation where using a registered trademark or an unregistered well-

known trademark of another party as the trade name in its enterprise name and mislead

the public constitutes unfair competition. This new provision connected Trademark law

and Anti-unfair Competition law.

• Strengthened the protection of trademark rights. (1) Expanded the type of acts that will

be considered infringement acts by including “using a trademark that is identical with or

similar to the registered trademark on similar goods without obtaining licensing from the

registrant of the registered trademark, and is likely to cause confusion” and “providing,

intentionally, convenience for such acts as infringe upon others' exclusive right of

trademark use, to facilitate others to commit infringement on the exclusive right of

trademark use”. (2) Added restrictions on the exclusive rights of registered trademark.

For example, article 59 provides that “the holder of the exclusive right to use a registered

trademark shall have no right to prohibit others from properly using the generic name,

graphics or models of a commodity contained in the registered trademark, or such

information as directly indicates the quality, main raw materials, functions, purposes,

weight, quantity or other features of the commodity, or the names of the geographical

locations as contained therein”. (3) Strengthened the law enforcement of administrative

departments. Firstly, the 2013 amendment specified that the fine that the local

administrative department for industry and commerce can impose, for example, “if the

illegal business revenue is RMB 50,000 yuan or more, a fine of up to 20% of the illegal

business revenue may be imposed; if there is no illegal business revenue or the illegal

revenue is less than RMB 50,000 yuan, a fine of up to RMB 10,000 yuan may be

imposed”. “Where a party passes off an unregistered trademark as a registered trademark

or uses an unregistered trademark in violation of Article 10 of this Law, if the illegal

business revenue is RMB 50,000 yuan or more, a fine of up to 20% of the illegal business

revenue may be imposed; if there is no illegal business revenue or the illegal business

99

product is produced and sold without permission of the patentee, if can prove the

legitimate source of the product, he shall not be liable for compensation”. (3)

Perfect the provisions regarding compensation for infringement. First of all, the

fine imposed on the patent infringer increased from no more than 3 times of the

unlawful gains in addition to confiscate the unlawful gains to no more than 4

times. Secondly, the fine imposed on the patent infringer increased from no

more than RMB 50,000 to RMB 200,000 if there are no unlawful gains. Thirdly,

the 2008 Patent law provides that “The amount of compensation shall include

the reasonable expenses paid by the patentee for putting an end to the

infringement”, which is not provided in 2000 Patent law. Fourthly, article 65 is

added which provides that “if the losses of the patentee, benefits of the infringer,

or royalties of the patent are all hard to determine, the people's court may, on the

basis of the factors such as the type of patent right, nature of the infringement,

and seriousness of the case, determine the amount of compensation within the

range from 10,000 yuan to 1,000,000 yuan.” (4) Revised provisions regarding

pre-litigation provisional measures and pre-litigation evidence preservation. In

order to be consistent with relevant provisions with Trademark law and

Copyright law, the 2008 amendment firstly added the provisions of a pre-

litigation provisional measure by citing relevant provisions from the Civil

Procedure law in article 66. For example, “the people's court shall make a ruling

within 48 hours from the time of its acceptance of the application. If an

extension is needed under special circumstances, a 48-hour extension may be

allowed. If a ruling is made to order to have the relevant act ceased, it shall be

enforced immediately. The party that is dissatisfied with the ruling may file once

for review, and the enforcement shall not be suspended during the period of

review. If the applicant does not take legal action within 15 days from the date

the people's court takes measures to have the relevant act ceased, the people's

court shall lift such measures.” Secondly, the newly enacted article 67 which

relates to filing an application with the People’s court for evidence preservation,

such as the conditions for making such application, the requirements to the

People’s court when making decisions of the such application, and what the

applicant should do regarding filing such application.

• Strengthened the administrative enforcement of patent protection. For example,

the revisions include increasing the administrative penalty standards from

imposing a fine of no more than three times the unlawful gain to four times to a

person who counterfeits the patent of another person, and a fine of no more than

RMB 50,000 increased to 200,000 which may be imposed on him if there are no

unlawful gains. The 2008 Patent law added provision of the power that the IP

related administrative department has when dealing with patent infringement.

Article 64 provides that “when the administration department for patent-related

work investigates and handles the suspected counterfeiting of a patent, it may,

based on evidence obtained, inquire the parties concerned, and investigate the

circumstances related to the suspected illegal act; it may conduct on-the-spot

revenue is less than RMB 50,000 yuan, a fine of up to RMB 10,000 yuan may be

imposed”. “Where the illegal business revenue is RMB 50,000 yuan or more, a fine of up

to five times the illegal business revenue may be imposed thereon; where there is no

illegal business revenue or the illegal business revenue is less than RMB 50,000 yuan, a

fine of up to RMB 250,000 yuan may be imposed thereon. If a party has committed

trademark infringement on two or more occasions within five years or falls under any

other serious circumstances, it shall be subject to a heavier punishment”. Secondly, the

2013 Trademark law also specified that “an administrative department for industry and

commerce may suspend the investigation and handling of the case if disputes arise over

the ownership of the trademark or if the right holders simultaneously bring a trademark

infringement lawsuit to the people's courts”. (4) Increased the legal compensation for

infringement. The 2013 Trademark law not only provided a clear procedure of how to

decide the amount of compensation that the infringer should pay, but also increased the

amount of compensation from RMB 500,000 yuan in 2000 to RMB 3 million yuan in

2013 if “it is difficult to determine the actual loss suffered by the right holder as a result

of the infringement, the profits gained by the infringer from the infringement or the

royalties of the registered trademark concerned.” Furthermore, if “an infringer

maliciously infringes upon another party's exclusive right to use a trademark and falls

under serious circumstances, the amount of damages may be determined as not less than

one time but not more than three times the amount that is determined according to the

aforesaid methods”. In addition, the 2013 amendment also take “the royalties of the

registered trademark” into consideration when deciding the amount of compensation. (5)

Reduced the burden of right holders to provide evidence. Article 63 provides that “where

the right holder has exhausted its efforts in discharging the obligation of burden of proof,

but the account books and materials related to the infringing acts are mainly controlled by

the infringer, the people's court may, for the purpose of determining the amount of

damages, order the infringer to submit account books and materials related to the

infringing acts”.

• Revised the provision of renewal, transfer and licensing of registered trademarks. (1) The

2013 Trademark law provides that “where a trademark registrant intends to continue

using the registered trademark upon expiry of the validity period of registration, the

trademark registrant shall go through the renewal procedure within 12 months prior to the

expiry date”, while the 2001 Trademark law requires to file “an application for renewal

of the registration shall be made within six months before the expiry date”. (2) The 2013

Trademark law added new provisions regarding when transferring a registered mark, the

trademark registrant shall transfer “other similar trademarks he has registered for the

same kind of goods, and other identical and similar trademarks he has registered for

similar goods” along with it. It also specified that “the trademark licensing shall not be

used against a bona fide third party”.

• In order to reduce the confusion among “revoking a registered trademark”,

“disputes/opposition”, and “declare a registered trademark invalid”, the 2013 amendment

changed Chapter 5 from “Adjudication of disputes concerning registered trademarks” to

“Declaration of the invalidity of registered trademarks”. The 2013 Trademark law not

100

inspection of the places where the suspected illegal act is committed; consult

and duplicate the relevant contracts, invoices, account books and other related

materials; and check the products related to the suspected illegal act and seal or

detain the products that are proved to be produced by the counterfeited patent.”

It also specified the obligations of relevant parties by providing that “when the

administration department for patent-related work performs its duties as

prescribed in the preceding paragraph, the parties concerned shall provide

assistance and cooperation, instead of refusing to do so or creating obstacles.”

only changed “revoke a registered trademark” into “declare the registered trademark

invalid” of all the provisions in Chapter 5, but also added relevant provisions regarding

declaring the registered trademark invalid. For example, article 47 specified that for a

registered trademark that is declared invalid, the exclusive right to use the registered

trademark thereof shall be deemed as non-existent ab initio.

• Specified the activities of trademark agency. Articles 19, 20, and 21 are the new

provisions enacted in 2013 amendment for regulating the activities of trademark agency,

these three articles provided the principles trademark agencies should uphold, the

obligations and certain rules they should follow when conducting their activities. Article

68 is also newly added and provides what punishments the trademark agency will receive

if it committed the acts listed in this article.

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Appendix A2 Utility model patents and design patents application and

granting

Figure A2.1: Total number of utility model patents applied from 1995-2016 in China.


Figure A2.2: Total number of utility model patents applied by foreign applicants from

1995-2016 in China.


0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Domestic

Foreign

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

199

5

199

6

199

7

1998

199

9

200

0

200

1

200

2

200

3

200

4

2005

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

2014

201

5

201

6

102

Figure A2.3: Number of utility model patents applied by foreign applicants from four



Figure A2.4: Total number of utility model patents granted from 1995-2016 in China.


0

500

1000

1500

2000

2500

3000

3500

4000

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Japan

USA

EU

South Korea

0

100000

200000

300000

400000

500000

600000

700000

800000

900000

1000000

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Domestic

Foreign

103

Figure A2.5: Total number of utility model patents granted to foreign applicants from

1995-2016 in China.


Figure A2.6: Number of utility model patents granted to foreign applicants from four



0

1000

2000

3000

4000

5000

6000

7000

8000

9000

19

95

19

96

19

97

1998

19

99

20

00

20

01

20

02

20

03

20

04

2005

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

2014

20

15

20

16

0

500

1000

1500

2000

2500

3000

3500

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Japan

USA

EU

South Korea

104

Figure A2.7: Total number of design patents applied from 1995-2016 in China.


Figure A2.8: Total number of design patents applied by foreign applicants from 1995-

2016 in China.


0

100000

200000

300000

400000

500000

600000

700000

Domestic

Foreign

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

1995

1996

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

2009

2010

20

11

20

12

20

13

20

14

20

15

20

16

105

Figure A2.9: Number of design patents applied by foreign applicants from four different

countries and regions from 1995-2016 in China.


Figure A2.10: Total number of design patents granted from 1995-2016 in China.


0

1000

2000

3000

4000

5000

6000

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

EU

Japan

USA

South Korea

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

500000

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Domestic

Foreign

106

Figure A2.11: Total number of design patents granted to foreign applicants from 1995-

2016 in China.


Figure A2.12: Number of design patents granted to foreign applicants from four



0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

1995

1996

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

2009

2010

20

11

20

12

20

13

20

14

20

15

20

16

0

1000

2000

3000

4000

5000

6000

7000

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

EU

Japan

USA

South Korea

107

Chapter 4: The influence of the institutional environment in

host countries on innovation offshore governance choice and

business outcomes

Abstract

In this paper, we analyse the effect of institutional factors (rule of law and IPR) on

governance choices when offshoring innovation and whether certain business outcomes

are achieved via offshoring innovation activities. Using survey data from the ORN

database, the regression results suggest that different governance modes are preferred in

different institutional environments: offshore outsourcing is preferred when IPR

protection in host countries is strong, while captive mode is more likely to be adopted in

host countries with good quality of rule of law. Further analysis of failure to select the

predicted governance mode shows that failure to select captive mode has positive

impact on firm performance, such as organisational flexibility, firm’s overall

competitiveness, and productivity. However, failure to select outsourcing mode is

negatively related to the probability of achieving outcomes such as focus on core

competencies, access to qualified personnel, organisational flexibility and firm’s overall

competitiveness. We find a negative relationship between the IPR protection strength in

host countries and the probability of focusing on core competencies, and accessing to

qualified personnel; rule of law in host countries is positively related to the probability

of focusing on core competencies, but negatively related to the probability of increasing

firm’s overall competitiveness, service quality, accessing to new markets, and

breakthrough process improvement(s).

4.1 Introduction

Over the past years, multinational companies have adopted different approaches (fully

owned and offshore outsourcing) towards managing their business activities overseas.

Firms within the same industry may adopt varied strategies to develop new products or

technologies. For example, Apple (1976), Microsoft (1975) and Samsung Electronics

(1969) which were all founded at about the same time (Apple, 2018; Microsoft, 2018;

108

Samsung, 2018), have chosen different routes to expand their innovation activities

abroad. Apple and Microsoft established their first overseas research institute in Europe

in 1988 and 1997, respectively, and Samsung Electronics established its first research

institute in US in 1990, and then in Europe in 1996 (Dow Jones News Service, 1988;

Newswire, 2001; PR Newswire, 1996; Korea Economic Weekly, 1990). However,

Microsoft and Samsung also established R&D centres in other countries such as China

and India around early 2000s. Apple established R&D centres offshore only in recent

years (Xinhua News Agency, 1998; The Times of India, 1998; The Korea Herald, 2001;

The Economic Times, 2000; Si, 2016; Vietnam News Summary, 2017). Firms may

adopt both types of governance mode to manage their R&D activities in the same

country, for example, in the pharmaceutical industry, Wuxi Apptec is one of the leading

contract research organisations in China, serving the top 20 pharmaceutical companies

in the world (Wuxi Apptec, 2018). At the same time, most of these top 20

pharmaceutical companies also have established their own R&D centres in China. These

examples raise an important question: why do companies adopt different offshore

governance mode strategies for their R&D activities in different countries and even in

the same country? In order to answer this question, it is important to identify and

evaluate the factors behind offshore governance choices, as well as the factors behind

the achievement of certain business outcomes from offshoring.

Previous studies have identified institutional factors influencing offshore governance

choices for innovation, namely intellectual property rights (IPR) protection strength in

host countries (Oxley, 1999), however, even for offshoring innovation activities, IPR is

not the only institutional factors that can affect a firm’s offshoring decisions

(Hutzschenreuter, et al., 2011; Gooris & Peeters, 2014). The role of rule of law (and

IPR protection strength) in host countries on offshore governance choices, as well as

whether they will affect a firm’s satisfaction regarding offshoring, have not been

analysed extensively and need further analysis, especially for offshoring innovation

activities. Extant literature has also highlighted that firms are able to select their

governance modes based on their purpose of maximising their performance (Shavers,

1998; Brouthers, 2002). Therefore, that it is the alignment between governance and the

prediction of governance based on conceptual framework that affects performance, but

not the direct effect that governance choice has on performance, and this requires

109

appropriate analysis to address endogeneity in the relationship between governance

choice and firm performance.

In this paper we aim to provide evidence on the factors behind offshore governance

choices, as well as business outcomes that could be achieved via offshoring innovation

activities (i.e., focus on core competencies, access to qualified personnel, improve

organisational flexibility, increase in firm’s overall competitiveness, increase

productivity/efficiency, improve service quality, better access to new markets, and

breakthrough process improvement(s)). Using the survey data from Offshoring

Research Network (ORN) database, we firstly present an overview of the importance of

factors and agreement regarding achievements. Second, we adopt a Heckman-based

approach and first test the relationships between institutional factors and the offshore

governance choices, and then we analyse the effect institutional factors and the

governance misalignment have on the achievement of offshoring outcomes. Regression

results show that rule of law in host country has a positive effect on the probability to

choose captive mode, while IPR protection strength in host countries is negatively

related to choosing a captive mode. Regarding the achievements of offshore outcomes,

firstly firms that fail to adopt offshore outsourcing mode are less likely to focus on core

competencies, access to qualified personnel, improve organisational flexibility and

firm’s overall competitiveness, but are more likely to gain access to new markets.

Regarding firms that failed to adopt captive mode, they are more likely to improve

organisational flexibility, firm’s overall competitiveness, and productivity/efficiency.

The results also show that the quality of rule of law and the strength of IPR protection in

host countries affect the probability of achieving offshore outcomes. Our findings

contribute to existing literature and enhance our understanding of firm’s offshore

governance choices and the role institutional factors played during offshoring

innovation activities.

This paper is organised by starting with a literature review on influencing factors behind

offshore governance choices, the pros and cons of each mode, and development of the

theoretical framework of this research in section 4.2. In section 4.3, we account for the

procedure of sampling selection and the data. In sections 4.4 and 4.5, we present the

descriptive data analysis results and regression results. Section 4.6 concludes the paper

where we discuss potential implications.

110

4.2 Offshoring business services and governance choices

The international business (IB) literature has long investigated firms’ international

strategies and operations, and identified three main offshoring governance modes:

dominant equity mode (also referred to as captive offshoring), balanced mode (joint-

ventures), and external governance (offshore outsourcing) (Anderson & Gatignon,

1986). Captive offshoring refers to setting up a wholly owned subsidiary or new unit

abroad in order to fully control its business activities and take advantage of locational

resources (Javalgi, et al., 2009; Kedia & Lahiri, 2007; Lewin & Volberda, 2011).

Offshore outsourcing refers to demand side firms sourcing specific functions and

processes to a third-party (or vendor) in a foreign country, so that it can create value

primarily through low cost (Javalgi, et al., 2009; Manning, et al., 2008). Joint ventures

refers to a situation where an organisation partners with a local company in the host

country, e.g. by forming a new separate company to which they both contribute

resources, or build up equity based collaboration (Luo, et al., 2013; Anderson &

Gatignon, 1986). Lewin and Couto (2007) argue that joint ventures are rarely used for

offshoring, and that the equity holders in these cases can exert influence over the

foreign entity that is similar to that exerted in dominant equity mode. Therefore, the

discussion that follow will focus on the polar modes of captive and outsourcing, and

only captive offshoring and offshore outsourcing will be analysed later in the empirical

section.

With regard to service offshoring, researchers have found a shift of preference of

governance mode choices over time. Lewin and Volberda (2011) stated that captive

offshoring mode was preferred over the outsource mode by firms in early years, but this

has changed more recently, indicating that companies’ preference has been shifted to

the outsource mode regardless of nationality or functions. Due to the important role that

governance mode has played in global sourcing, and also because of increase in number

of service providers, in this section, the factors behind the governance mode decisions

will be discussed, followed by introducing the pros and cons of each type.

111

4.2.1 Factors influencing offshore governance choices

Transaction Cost Economics (TCE) address a central strategic issue, namely the

boundary of the firm, and argues that the attributes of a transaction influence the

governance decision, i.e., whether the transaction should be undertaken inside the firm

or contracted to an external supplier (Jensen & Pedersen, 2012). The focus of TCE

theory is to minimise the combination costs involved in transactions, which refer to the

costs of negotiating a contract, monitoring firm’s performance, and tracking the

performance of the partners which the contract was signed with (Williamson, 1985).

According to the TCE perspective, transactions which require low asset specificity and

for which there is high number of suppliers will occur in the market, while those with

high asset specificity within the hierarchy form (Williamson, 1991). Researchers

suggest that captive mode (within the hierarchy form) can help to avoid the risks

inherent in transferring valuable, firm-specific knowledge to suppliers of the outsourced

services when offshoring innovation activities (Kinkel & Maloca, 2009; Caniato, et al.,

2015). Studies have also stated that captive offshoring provides an opportunity for firms

to reduce overall costs, since wages in host countries normally are lower than in the

home country (Youngdahl & Ramaswamy, 2008), but this is also true for outsourcing.

There is some consensus that the most common reason to adopt offshore outsourcing

mode is cost reduction (Farrell, 2005; Lewin & Couto, 2007). Besides the savings from

labour arbitrage (Gupta, et al., 2007), scholars argue that to offshore outsource some

peripheral activities to suppliers who have more specialised knowledge and expertise in

a given area and may be able to operate on a larger scale, may result in significant cost

advantages for the firm (Hutzschenreuter, et al., 2011). Furthermore, offshore

outsourcing helps reduce fixed investments required by captive operations (Kotabe &

Murray, 2004). However, scholars argue that firms should not only consider the cost

reduction during the process of offshoring. As the scale and scope of business being

offshored gradually grow, they may find that the labour arbitrage advantages, as well as

their core competences may reduce. In addition, lack of organisation capabilities to

coordinate and manage various offshore activities is also typically exposed (Lewin &

Volberda, 2011).

Resource-Based-View (RBV) scholars argue that TCE over-emphasises the cost

minimisation and neglects the value creation aspect of a transaction, while RBV

assumes that firms try to maximise long-run profits through exploiting and developing

112

resources for competitive advantage (Javalgi, et al., 2009). Scholars have claimed that

offshoring decisions are driven by more strategic reasons, such as accessing high-level

human capital, building organisational flexibility, increasing local absorptive capacity,

sourcing of innovation, accessing talent with specialised capabilities around the world

(which directly relates to the decline in young adults selecting S&E careers in the

West), as well as seeking new markets (Lewin, et al., 2009; Massini & Lewin, 2012). It

has been argued that captive offshoring could provide a chance for firms to access

skilled and qualified personnel and resources in host countries, as well as expand and

enter new markets (Kotlarsky & Oshri, 2008).

Some scholars have also stated that offshore outsourcing can offer firms access to new

resources and market knowledge to be integrated into firms’ own knowledge base

(Grimpe & Kaiser, 2010; Bertrand, 2011). With regard to offshoring innovation

activities, several studies have suggested that innovation activities constitute the core of

a firm’s competitive advantage, which is why decisions about these activities require

special strategic considerations. Therefore, a hierarchical governance mode should be

adopted (Lewin, et al., 2009; Barney, 1991; Grant, 1996). Other scholars argue that

some innovation activities (such as R&D and product development) have utilised

offshore outsourcing strategy by using suppliers to develop and deliver particular

technologies for use in the client's (i.e., the outsourcing firm's) new products. However,

suppliers are commonly only involved in part of the development process (Carson, et

al., 2006).

Williamson suggests that “the institutions of governance (firms, markets, hybrids,

bureaus) are embedded in the institutional environment" (Williamson, 1992), and the

institutional environment can affect the exchange costs. Furthermore, resources are

context based, their values depend on the characteristics of the given environment,

because resources also are relatively stickier than their environment, resource changes

and adaptations often lag behind environmental changes (Teece, et al., 1997). As

resource-based advantages tend to be viewed from a particular institutional context,

institutional factors can influence the perceptions and actions of consumers, employees,

and regulators in specific country markets resulting in habitual, historically value-laden

decisions (Oliver, 1997). Therefore, institutional theory should be utilised to analyse the

governance choices. Indeed, from the institutional theory perspective, the legal system

of a country has the potential to affect several economic and social activities, such as

113

business practices, compliance with the law, degree of protection of minority

shareholders, tax regimes, financial market regulations and corporate control

mechanisms (Flores & Aguilera, 2007). Previous studies have shown that the global

expansion of MNCs can be deeply affected by the host country legal system with regard

to the company’s foreign operations (Flores & Aguilera, 2007; Gooris & Peeters, 2016).

The legal system in host country and its enforcement is an important factor that firms

need to consider when they are making offshoring decisions (Javalgi, et al., 2009;

Gooris & Peeters, 2016). Some scholars found that firms often adopt captive mode in

countries with weak legal systems (Kshetri, 2007). With regard to innovation activities

offshoring, studies have argued that offshore outsourcing can increase the risk of

knowledge leakage (Mudambi & Tallman, 2010), as firms may have to share sensitive

information with foreign suppliers. This is a particularly serious issue when it comes to

offshore outsourcing innovation activities, because intellectual property (IP) leakage can

erode firm’s competitive advantages (Hutzschenreuter, et al., 2011). Researchers also

demonstrated that home-host country’ cultural distance influences the governance

choices in service offshoring, and that firms are more likely to adopt captive mode to

respond to internal uncertainties caused by geographic and cultural distance (Gooris &

Peeters, 2014; Hutzschenreuter, et al., 2011).

Finally, firm characteristics and capabilities have been identified as significant in firms’

boundary decisions (Leiblein & Miller, 2003). Scholars have found that both the

sourcing history of the firm and technological context significantly influence the

governance choices (Hutzschenreuter, et al., 2011; Steensma & Fairbank, 1999;

Manning, et al., 2018). In addition, firm size can affect offshoring decisions, and some

scholars also argue that the size of the company can affect the governance choices, as

captive offshoring requires the investments of more capital and resources, it is more

likely to be the major mode for larger companies (Hutzschenreuter, et al., 2011).

However, there is contradicting evidence on the role firm size has on governance

choices as Roza and colleagues find that the choices of governance mode are not

affected by firm size (Roza, et al., 2011).

In summary, the discussion above shows that TCE and RBV complement each other to

analyse the governance choice together with its underlying motives of cost efficiency

and value creation (Meyer, et al., 2009), and that institutional environments affect the

performance of both TCE and RBV. Studies have also suggested that firms are required

114

to adopt a suitable governance mode that is in line with firm’s resources, transaction

characteristics, and local context (Leiblein, et al., 2002; Brouthers, 2002; Mudambi &

Tallman, 2010). Therefore, the conceptual framework of this paper is shown in Figure

4.1.

Figure 4.1: Conceptual framework.

4.2.2 The pros and cons of different offshore governance modes

In the previous section we discussed the choices of both types of offshore governance

mode and how they are affected by different influencing factors. Studies have also

identified several outcomes regarding the offshore governance choices, which we

discuss in this section.

First, with regard to the benefits of offshore outsourcing mode, scholars argue that by

offshore outsourcing peripheral activities, they can free limited resources and give

companies a chance to focus more on their core businesses (Quinn & Hilmer, 1994;

Javalgi, et al., 2009). Second, if some of the business processes or functions have been

offshore outsourced, potential risks could be shared with suppliers, the focal firm’s

presence in overseas markets may increase, and perhaps most important, the offshoring

firm’s flexibility can also be enhanced through cooperation with suppliers (Bertrand,

2011; Kedia & Lahiri, 2007; Contractor, et al., 2010). Third, offshore outsourcing parts

of new product development activities to foreign suppliers, can increase product variety

Offshore governance mode

Captive offshoring Offshore outsourcing

Transaction cost economics (Williamson, 1985; Coase, 1937)

Transaction cost

minimisation

Degree of asset specificity

Transaction uncertainty (e.g., external environment)

Access to talent pools

Access to new market

Building organisational flexibility

Increase speed to market

Previous offshoring experiences

Resource-based view (Barney, 1991; Penrose, 1959)

Institutional theory(North, 1990; Scott, 1995)

Rule of law in host countries

IPRs protection in host countries

Culture and languageAvailability of suppliers

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and speed up the introduction of innovative products (Griffith, et al., 2009). Fourth,

researchers argue that offshore outsourcing can improve a firm’s innovation

performance by cooperating with suppliers (Griffith, et al., 2009), but some researchers

have found empirical support that captive offshoring has a stronger positive impact on

innovation outcomes than offshore outsourcing (Nieto & Rodríguez, 2011; Jensen,

2009).

Offshore outsourcing innovation activities may lead to the risk of loss of competitive

edge and increase dependency on providers (Paju, 2007). Excessive offshore

outsourcing of advanced activities (such as R&D) may hollow out firms’ competitive

bases, since over-dependency on suppliers can cause firms to lose their capacities to

respond to emerging new technologies in the medium to long term – which could erode

their innovation capabilities (Grimpe & Kaiser, 2010; Kotabe, et al., 2008; Paju, 2007).

Furthermore, over-dependency on suppliers may also lead to a loss of control, and

opens the door to opportunism and abuse (Quinn & Hilmer, 1994).

With regard to the benefits of captive offshoring mode, a captive offshoring mode

enables firms to leverage learning and knowledge from various nodes within the

network to elevate the overall capabilities of the organisation (Youngdahl &

Ramaswamy, 2008). Researchers argue that captive offshoring can let firms gain

experience of local labour market, specific laws, cultural values and behavioural

patterns, as well as skilled and qualified personnel, which may become the basis for

future growth in host country as well as home country (Hutzschenreuter, et al., 2011;

Kotlarsky & Oshri, 2008).

4.2.3 Contribution to the literature and research questions

Much research has been performed regarding the choice of offshore governance mode,

but most studies have only focused on a few selected factors. Even though the

importance of institutional factors on offshore governance mode choices has been

recognised by scholars (Flores & Aguilera, 2007; Javalgi, et al., 2009; Oxley, 1999;

Hutzschenreuter, et al., 2011), very few studies have comprehensively researched the

effect institutional factors have on offshore governance mode choices, in particular, it

remains unclear whether the quality of rule of law in host countries affects firm’s

choices. Furthermore, studies have stated that both captive offshoring and offshore

116

outsourcing increase the risk of IP losses, which may be caused by weak IPR protection

in the host country (Razzaque & Sheng, 1998; Griffith, et al., 2009). It is also not clear

whether a firm’s concern about the IPR regime in host countries and the IPR protection

strength in host countries will affect governance mode decisions.

Studies have found that the institutional environment (including quality of legal system

and IPR protection strength) in host country has impacts on firm performance (Peng,

2004; Chadee & Roxas, 2013; Bardhan & Jaffee, 2005). However, it is not clear

whether the institutional environment in the host country will affect the achievements of

certain offshore outcomes. It can be noted from the literature that it is the alignment

between firm’s governance choice and the recommendation of the theories which are

normally used to study governance choices (e.g., TCE, transaction cost entry mode

theory, RBV, etc.) that impact on firm performance (Brouthers, 2002; Shavers, 1998).

However, those studies are not specifically focused on offshoring innovation activities

for which firm’s knowledge is particularly important. In this paper, we test the

relationships between institutional factors in the host country (rule of law and IPR

protection strength) and the offshore governance choices, and the effects governance

misalignment and the institutional factors have on the achievement of offshore

outcomes. In short, the research questions of this paper are:

1. Do institutions such as rule of law and IPR regime in host countries affect a

firm’s offshore governance choices when offshoring innovation activities?

2. Do governance misalignment and institutions affect achieving business

outcomes when offshoring innovation activities?

4.3 Data

The data used in this paper comes from the ORN database. ORN was launched in 2004

at Duke University Centre for International Business Education and Research (CIBER),

The Fuqua School of Business (Lewin, et al., 2009). It comprises international and

longitudinal survey (conducted at 2005, 2006, 2007, 2009, and 2011) among companies

and is focussed on surveying offshore project implementations. This has resulted in a

database available to academics to analyse the dynamics across various administrative

and technical functions located in a wide range of countries or regions of the world,

across industries, and across types of delivery model (captive, third party or hybrid)

117

(Lewin, et al., 2009). Data in the ORN is collected by academic partners in various

countries, predominantly the United States, Australia, and European countries. This data

differs from typical collection sets by focussing on specific offshore implementations,

instead of general experience of responding companies. The ORN treats each offshored

operation, and the year it was offshored, as a separate observation, which means that the

individual offshoring initiative is the unit of analysis and a single company may appear

as multiple unique entries in the data set (Lewin, et al., 2009).

The functions firms offshored are categorised into 13 different types in the ORN

database, namely analytical/knowledge services, call centre/customer contact,

engineering services, finance/accounting, human resources, IT infrastructure, legal

services, marketing and sales, product design, research and development, software

development, supply chain and facilities, and a category “others”. In this paper, we

select product design, research and development, software development, and

engineering services to represent innovation functions. The remaining functions are

included in the analysis as “other business services”.

There are 513 implementations in our sample which includes data in survey years 2007,

2009 and 2011, 202 implementations are about innovation functions84. Tables 4.1 and

4.2 show the number of implementations of both captive and outsourcing mode in

different locations (Table 4.1) and in different industries (Table 4.2) in our sample. It

can be noted that offshore outsourcing mode is slightly preferred for offshoring both

business services and innovation functions. It can also be noted that the choices of

governance mode are varied among different locations firms choose to offshore. The

proportion of implementations that adopt captive governance mode is higher than the

ones that adopt offshore outsourcing mode for firms that have offshored business

services and innovation functions to China, Western developed countries and Far East

developed countries (Australia, Japan, Korea, Singapore), while the situation is the

opposite for the activities offshored to India, South East Asia (Philippine and Malaysia),

Eastern Europe85 (Poland, Russia, Slovakia, Ukraine), and Latin America (Argentina,

Brazil, Colombia, Mexico), where the offshore outsourcing mode is preferred.

84 The headquarters of all the firms in our sample are located in Europe and United States.

85 The proportion of implementations that adopt both types of governance mode is almost evenly

distributed when all business functions are considered, while the share of implementations with offshore

outsourcing mode is higher than the ones that adopt offshore outsourcing mode for firms that have

offshored innovation functions.

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Differences also exist by industry, Table 4.2 shows that firms that operate in

Financial/insurance/banking services, Professional services, and Software and

programming/business/IT services/telecommunication/electronics industries prefer

outsourcing when offshoring any functions in our sample, while captive offshoring

mode is chosen by a higher proportion of firms which in

Health/biotech/pharma/chemical, Manufacturing (the captive offshoring mode is only

slightly preferred when offshoring innovation functions), and High tech and technical

services industries.


functions by location.

Country

All business services Innovation functions

Outsourcing Captive Total Outsourcing Captive Total

China No. 27 45 72 17 21 38

% 37.5% 62.5%

44.7% 55.3%

India No. 126 65 191 58 28 86

% 66.0% 34.0%

67.4% 32.6%

Western developed

countries

No. 30 49 79 14 19 33

% 38.0% 62.0% 42.4% 57.6%

South East Asia No. 41 24 65 6 5 11

% 63.1% 36.9%

54.5% 45.5%

Far East developed

countries

No. 5 13 18 1 2 3

% 27.8% 72.2%

33.3% 66.7%

Eastern Europe No. 22 21 43 13 9 22

% 51.2% 48.8%

59.1% 40.9%

Latin America No. 36 9 45 8 1 9

% 80.0% 20.0%

88.9% 11.1%

Total No. 287 226 513 117 85 202

% 56.0% 44.0% 57.9% 42.1%

119


functions by industry.

Industry

All business services Innovation functions

Outsourcing Captive Total Outsourcing Captive Total

Financial/insurance/

banking services

No. 81 27 108 20 3 23

% 75.0% 25.0%

87.0% 13.0%

Health/biotech/

pharma/chemical

No. 10 13 23 5 8 13

% 43.5% 56.5%

38.5% 61.5%

Manufacturing No. 39 48 87 15 16 31

% 44.8% 55.2%

48.4% 51.6%

Professional services No. 28 9 37 8 2 10

% 75.7% 34.3%

80.0% 20.0%

Software and programming,

business/IT services,

telecommunication, and

electronics

No. 49 38 87 37 24 61

% 56.3% 43. 7%

60.7% 39.3%

High tech and technical

services

No. 24 48 72 13 20 33

% 33.3% 66.7%

39.4% 60.6%

Others No. 56 43 99 19 12 31

% 56.6% 43.4% 61.3% 38.7%

Total No. 287 226 513 117 85 202

% 56.0% 44.0% 57.9% 42.1%

4.4 Factors influencing offshoring (Descriptive data analysis results)

In this section we report and discuss the main descriptive data analysis results regarding

the driving forces, and risks factors behind the choice of the offshoring destination. We

also analyse firms’ achievement by governance mode and region where they offshored.

Firms were asked about the importance of the factors affecting their offshoring choice

on a 1-5 scale, from strongly disagree to strongly agree. Therefore, firms that give a

score of 4 and 5 indicate agreement with a factor, and the proportion of these firms is

calculated in this section by dividing the number of firms that view this factor important

120

with the total number of firms that answered this question. We compare firms’

preferences for these factors by offshoring locations, different functions, and the

different governance modes.

4.4.1 Factors driving offshoring

Figure 4.2 shows firms’ responses to the importance of the driving factors behind

different types of offshoring activities (other business services and innovation activities)

with different offshore governance modes (captive and offshore outsourcing) in

different locations (China, India, and developed countries). It can be noted that different

governance modes are adopted by firms that have offshored to different regions with

diverse offshoring activities, and they have varied preferences for different driving

factors over the time period of analysis.

There is a higher share of firms with offshore outsourcing mode that offshore both types

of activities to almost all these locations that view “labour cost savings” and “other cost

savings” as important than the share of firms with captive mode. The proportion of

firms with offshore outsourcing mode that offshore both types of activities to India and

developed countries that view “growth strategy” as an important factor is higher than

the proportion of firms with captive mode. However, the share of firms that offshored

innovation activities to China with offshore outsourcing mode almost equals the share

of firms with captive mode, and there is a higher share of firms with captive mode that

offshored other business services to China that view this factor important than the share

of firms with offshore outsourcing mode doing so.

Regarding “access to qualified personnel”, there is a higher proportion of firms with

offshore outsourcing mode that offshored innovation activities to all three locations that

view this factor important than the proportion of firms with captive mode that do so.

When considering offshoring other business services, the share of firms with offshore

outsourcing mode that rate this factor important is higher for firms choosing captive

mode in developed countries, while the opposite happens for firms that offshored to

China. There is a higher share of firms outsourcing both types of business activities to

all three locations that view “increase speed to market” important than the share of firms

with captive mode. However, the share of firms that offshore innovation activities to

China with captive operations that view this factor as an important driving force is

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slightly higher than the share of firms outsourcing. For firms that view offshoring a

“part of a global strategy”, the share of firms choosing captive mode is higher than the

share of firms choosing outsourcing. If firms are driven by “competitive pressure”, the

proportion of firms with captive mode is higher than the proportion of firms outsourcing

both types of activities to China and India.

Figure 4.2: Firms’ preference for driving factors behind offshoring decision of


locations.

0% 20% 40% 60% 80% 100%0% 20% 40% 60% 80% 100%

Exploit location-specific advantages

Increasing speed to market

Part of a global strategy

Access to new markets forproducts and services

Accepted industry practice

Competitive pressure(e.g., competitors' margin)

Need to improve service levels

Domestic shortage ofqualified personnel

Access to qualified personneloffshore

Growth strategy

Other cost savings

Labor cost savings

Enhancing efficiency throughbusiness process redesign

1234

1234

1234

1234

1234

1234

1234

1234

1234

1234

1234

1234

1234

Innovation Other business services

Captive mode

Offshore outsourcing

1: All countries 2: China 3: India 4: Developed countries

“What is the importance of each of the following drivers in considering offshoring this function?”1234

1234

1234

1234

1234

1234

1234

1234

1234

1234

1234

1234

1234

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4.4.2 Risk factors affecting offshoring

Figure 4.3 shows firms’ responses to the importance of selected risk factors among

different types of offshoring activities (all business services and innovation activities)

with different offshore governance modes (captive and offshore outsourcing) in

different locations. It can be noted that there is a higher proportion of firms that adopted

offshore outsourcing mode that are concerned about data security, service quality,

operational efficiency, cultural differences with employees in offshore location, political

instability in offshore location, lack of IPR protection, and legal/contractual risks when

offshoring business services and innovation functions to all three regions. With regard

to captive mode, there is a higher share of firms that offshored innovation functions to

the three regions that are concerned about a lack of acceptance from customers, while

firms that offshored other business services to all three regions are more concerned

about a loss of managerial control. The share of firms that offshored other business

services and innovation functions to China and India that view the risk factor “high

employee turnover” as important is higher than the share with offshore outsourcing

mode doing so. In addition, there is a higher proportion of firms that offshored

innovation functions with captive mode to China and India that are concerned about

“Increasing difficulty in finding qualified personnel” than the proportion of firms with

outsourcing.

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Figure 4.3: Firms’ preference for risk factors behind offshoring decision of innovation

and other business services, by different governance mode in varied locations.

0% 20% 40% 60% 80% 100%0% 20% 40% 60% 80% 100%

Political instability inoffshore location

Concerns about industrialrelations/trade unions at home

Political backlash at home

Legal /contractual risks

Lack of intellectualproperty protection

Increasing difficulty in findingqualified personnel offshore

Wage inflation inoffshore location

High employee turnoverin offshore service center

Concerns aboutoperational efficiency

Concerns about service quality

Concerns aboutdata security

Cultural differences withemployees in offshore location

Internal resistanceto offshoring

Loss of synergy acrossfirm activities

Loss of internal capabilities/process knowledge

Loss of managerial control

Lack of acceptancefrom customers

Lack of acceptancefrom internal clients

Innovation Other business services

12341234

1234

1234

123412341234

12341234

12341234

12341234

1234

1234

12341234

1234

“What is the importance of each of the following risks in considering offshoring this function?”12341234

1234

1234

123412341234

12341234

12341234

12341234

1234

1234

12341234

1234

Captive mode



124

4.4.3 Outcomes achieved via offshoring

The ORN survey also asks about outcomes of offshoring, such as “increased

productivity/efficiency”, “better focus on core competencies”, “better access to qualified

personnel”, “improved organisational flexibility”, “improved service quality”, “better

access to new market”, “breakthrough process improvement(s)”, and “increase in firm’s

overall competitiveness”. Figure 4.4 reports the proportion of firms by different

governance mode, who agreed that the different outcomes have been achieved. It can be

noted that “better focus on core competencies”, “improve organisational flexibility” and

“better access to qualified personnel” are the most important outcomes agreed by firms

with an outsourcing mode that offshored innovation functions to all three regions is

higher than the share of firms with captive mode. “Improved service quality” is

achieved by a higher share of firms with captive mode that offshored innovation and

other business services to all three regions, except for firms that offshored other

business services to China. Regarding the outcome “increased productivity/efficiency”,

the proportion of firms that offshore innovation function to China and India with captive

mode and achieved this outcome is higher than the proportion among firms with

outsourcing mode. However, the result is the opposite for firms that offshored other

business services to China. “Increase in firm's overall competitiveness” is another

outcome achieved by many firms, and it can be noted that the share of firms with

captive mode that offshore innovation functions to India and developed countries

achieving this is higher than the share of firms outsourcing, while firms that offshored

to China indicate the opposite. For firms that offshored other business services to all

three regions, the share of firms with captive mode is higher than the share of firms

outsourcing. A higher share of firms that offshore outsourced innovation functions to

China and India achieved outcome of “better access to new market”, while the

proportion is higher for firms with captive mode that offshored other business services

to all three regions. “Breakthrough process improvement(s)” is achieved by a higher

proportion of firms that offshore outsourced innovation functions to China and

developed countries, and the share of firms that offshore outsourced other business

services to developed countries that achieved this outcome is higher than among firms

that offshored to China and India.

125

Figure 4.4: Firms’ preference for the achievements behind offshoring decision of


locations.

0% 20% 40% 60% 80% 100%

Increased productivity/efficiency

Better focus oncore competencies

Better access toqualified personnel

Improved organizationalflexibility

Improved service quality

Better access to new markets

Breakthrough processimprovement(s)

Increase in firm'soverall competitiveness

Innovation function Other business services

“To what extent do you agree that offshoring has measurably led to the following outcomes?”

1234

1234

1234

1234

1234

1234

1234

1234

0% 20% 40% 60% 80% 100%

1234

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Captive mode



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4.5 Regression results

From the discussion above, it can be noted that there is heterogeneity in the driving

factors, perception of risks, and outcome by offshoring mode, business function and

location. In this section, we focus on firms that offshored innovation functions, and the

ORN survey has categorised all the functions that firms have offshored to other

countries into 12 different types of functions86. We selected firms that offshored

software development, product design, engineering services, and R&D functions as the

ones that offshored innovation activities. We analyse the relationships between

influencing factors and offshoring outcomes; in particular, we test the role of

institutional factors in these relationships, i.e., IPR protection strength and the rule of

law in host countries, and whether governance misalignment could affect the probability

to achieve certain outcomes.

Previous studies have indicated that expectations of future performance are what drives

firms to select an offshoring governance mode. This, in turn, results in a form of self-

selection bias where the observed level of performance depends on unobserved factors

that influence the firms’ governance choices. In addition, there is a potential for

endogeneity problems to affect results when using governance mode as the explicative

variable of firm performance, as the former is also affected by the expected level of the

latter (Shavers, 1998; Brouthers, 2002). In this paper, we follow Elia et al. (2014),

Leiblein et al. (2002) and Shaver (1998), and adopt a two-stage approach as described

by Heckman (Heckman, 1979) to control for the potential endogeneity problem arising

from the self-selection bias.

In the first stage, we estimate a probit model in which the governance mode

(outsourcing versus captive) is the dependent variable, and it is regressed against a set

of variables capturing influencing factors behind offshore governance choices. The first

stage allows us to calculate the inverse Mills ratio λ (as in Leiblein et al., 2002 and Elia

et al., 2014), to be used as a control variable in the second stage, thus providing

consistent and unbiased coefficients (Greene, 1997). The first stage is also employed to

estimate the misalignment between the governance mode predicted by the model and

86 The 12 functions include: Call Center/Customer contact, Engineering Services, Finance/Accounting,

Human Resources, IT Infrastructure, Legal Services, Marketing and Sales, Product Design, Research and

Development, Software Development, Supply Chain and Facilities, and Other.

127

the one actually adopted by each firm in our sample by comparing the estimated

governance choice and the actual governance choice.

In the second stage, we adopted an ordered probit model to estimate the performance by

including the governance choice, the inverse Mills ratio, the governance misalignment,

and the institutional factors (i.e., rule of law and quality of IPR protection in host

countries). In the following sections, we present the models and the variables employed

in the two stages.

4.5.1 First stage: governance choice

4.5.1.1 Dependent variables

The ORN survey categorised the service model of the implementation offshored to host

countries as offshore outsourcing mode and captive mode. We build a binary variable

“governance mode” that take value “1” if captive mode is chosen and value “0” if

offshore outsourcing mode is chosen. This is our dependent variable “captive_mode”.

4.5.1.2 Explanatory variables

This paper aims to test the relationships between firm’s concerns about IPR in host

countries and firm’s offshore governance choices, as well as the relationships between

the institutional factors (rule of law and IPR protection strength) in host countries and

firm’s governance choices. The variable regarding concern about risk of IP loss is

obtained from the ORN survey, firms are asked of their degree of agreement regarding

the importance of each risk factors, “risk_iploss” represents concern about lack of

intellectual property protection. The original score ranged from 1 (strongly disagree) to

5 (strongly agree). In order to test the role of the quality of rule of law in host countries,

we used the International Property Rights Index (IPRI) as developed by Property Rights

Alliance as a proxy for measuring the quality of host country’s legal system, and we

calculated the average score 3 years prior to the survey year. This variable measures the

protection strength of property rights of a country from three aspects (and each aspect is

constituted by 3-4 sub-aspects): country’s Legal and Political environment (LP: judicial

independence, rule of law, political stability, and control of corruption), Physical

Property Rights (PPR: protection of physical property rights, registering property, and

128

access to loans) and Intellectual Property Rights (IPR: protection of intellectual property

rights, patent protection, and copyright piracy).

The United States Trade Representative’s Special 301 report87 is adopted to indicate the

IPR protection strength of host countries (Zhao, 2006). The strength of IPR protection is

weighted by whether the host country is on the Special 301 Watch list 3 years before the

survey year. If a host country is on the Priority Foreign Country List or under Section

306 Monitoring88, the IPR protection strength is assigned value -3. If host country is on

the Priority Watch List, it is assigned value -2, and if the country is on the Watch List, it

is assigned value -1. If a host country does not appear in the US Special 301 report, the

IPR protection strength is assigned value 0. We calculate the average value of 3 years

IPR protection strength before the survey year of each host country, and this is the

variable included in the analysis as “host_ipr”. Therefore, “risk_iploss”, “host_ipri”,

and “host_ipr” are adopted to be the explanatory variables.

4.5.1.3 Control variables

We include factors which are identified from previous studies that can affect the choice

of offshore governance mode in the control variables, such as cost reduction, access to

talent, firm size, and characteristics of host countries (e.g., number of R&D

researchers). Cost reduction is the typical reason to drive firms offshore, and is

especially important for offshore outsourcing (Farrell, 2005; Lewin & Couto, 2007).

Therefore, “driv_cost” is adopted to be the control variables by calculating the mean

value of driving factors “labour cost savings” and “other cost savings” in the ORN

survey. Offshoring decisions are driven by strategic reasons, which include access to

talent, market seeking, increasing competitive pressure in the global market, and

increase time-to-market for new products (Holcomb & Hitt, 2007; Massini & Lewin,

2012; Kotlarsky & Oshri, 2008). “driv_aqp”, “driv_newmark”, “driv_globstr”, and

“driv_speed2m” are therefore also used as the control variables. Size of the company

can affect the choices of the governance mode (Hutzschenreuter, et al., 2011), so firm

size is considered to be a control variable (emp_world), and the number of employees is

also log transformed and used to represent the firm size in this paper.

87 Special 301 report “reflects the outcome of a Congressionally-mandated annual review of the global

state of intellectual property rights (IPR) protection and enforcement” (USTR, 1997). 88 “This means that USTR will be in a position to move directly to trade sanctions if there is slippage in

the country’s enforcement of bilateral IPR agreements” (USTR, 1997).

129

Firms prefer to locate business activities to countries with similar culture as in the home

country (Bunyaratavej, et al., 2007), we include cultural distance to be another control

variable, which is calculated by using the Kogut and Singh (1988) index to the items

provided by Hofstede (2001). Finally, the ORN survey data reveals differences of the

choice of governance modes across countries and industries, which are also controlled

in the regressions by using 6 country dummies (host_country_dummy) and 6 industry

dummies (industry_dummy). Detailed variable descriptions are shown in Table 4.3.

Table 4.3: Variable description (first stage)

Variable name Value Data source

Dependent

variable

captive_mode 1 = captive mode; 0 = offshore outsourcing mode ORN survey

Explanatory

variables

host_ipri Reflects each country’s Legal and Political environment (LP:

judicial independence, rule of law, political stability, and control

of corruption), Physical Property Rights (PPR: protection of

physical property rights, registering property, and access to

loans) and Intellectual Property Rights (IPR: protection of

intellectual property rights, patent protection, and copyright

piracy). The overall grading scale of IPRI ranges from 0

(representing non-existence of secure property rights in a

country) to 10 (representing the strongest level of property

rights protection).

IPRI index by

Property

Rights

Alliance

host_ipr 0 = not on the list; -1 = on the watch list; -2 = on the priority

watch list; -3 = on the priority foreign country list or under

Section 306 Monitoring

USTR’s

Special 301

report

risk_iploss 1--("important or very important" 4,5) -- Lack of intellectual

property protection

ORN survey

Control

variables

driv_cost 1--("important or very important" 4,5) -- Cost savings ORN survey

driv_newmark 1--("important or very important" 4,5) -- Access to new markets

for products and services

ORN survey

driv_aqp 1--("important or very important" 4,5) -- Access to qualified

personnel offshore

ORN survey

driv_globstr 1--("important or very important" 4,5) -- Part of a global

strategy

ORN survey

driv_speed2m 1--("important or very important" 4,5) -- Increasing speed to

market

ORN survey

cul_dis Hofstede's cultural dimensions: Computed by applying the

Kogut and Singh (1988) index to the items provided by

Hofstede (2001).

Hofstede’s

index

emp_world log transformed from variable "emp_world", which indicates the

number of employees Worldwide (including domestic). For the

observations which answered the number of employees is 0,

they all treated as missing value

ORN survey

host_country_

dummy

China; India; Western developed countries (Austria, Canada,

Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,

Netherlands, Norway, Portugal, Spain, Sweden, Switzerland,

United Kingdom, US); South East Asia (Malaysia, Philippine);

Other developed regions (Australia, Japan, Korea, Singapore);

Latin America (Argentina, Brazil, Colombia, Mexico); Eastern

Europe (Poland, Russia, Slovakia, Ukraine) (reference variable).

ORN survey

130

Industry_dummy financial/insurance/banking services;

health/biotech/pharma/chemical; manufacturing; professional

services; software and programming, business/IT services,

telecommunication, and electronics; high tech and technical

services; other industries (aerospace, agriculture, automotive,

retail, utilities, transportation, etc.) (reference variable).

ORN survey

Table 4.4 shows the descriptive statistics and the correlation matrix of the explicative

variables included in first stage analysis. All correlation coefficients are below 0.6, and

no strong correlations are observed between variables. The variance inflation factor

(VIF) is also calculated to further check the collinearly among variables. We found that

the range of VIF scores of the independent variables is between 1.11 and 2.16, which

indicates absence of collinearity (lower than 10) (Wooldridge, 2012).


（first stage）

Variable 1 2 3 4 5 6 7 8 9 10 11

1 captive_mode 1.000

2 risk_iploss -0.037 1.000

3 host_ipri 0.166 0.092 1.000

4 host_ipr 0.041 -0.010 0.334* 1.000

5 driv_cost -0.147 0.195* -0.181 -0.172 1.000

6 driv_newmark 0.135 0.090 0.335* 0.127 0.035 1.000

7 driv_aqp -0.178 0.144 -0.065 -0.008 0.088 -0.013 1.000

8 driv_globstr 0.222* 0.293* 0.224* -0.008 0.147 0.459* 0.076 1.000

9 driv_speed2m -0.188* 0.138 0.023 -0.039 0.084 0.346 0.237* 0.256* 1.000

10 cul_dis 0.009 0.030 -0.587* 0.027 0.081 -0.231* -0.013 -0.184* -0.161 1.000

11 emp_world 0.149 0.179 -0.035 -0.066 0.085 -0.044 -0.080 0.166 -0.086 -0.040 1.000

Obs . 202 202 202 202 202 202 202 202 202 202 202

Mean 0.421 3.045 5.240 -1.417 3.958 2.475 3.797 3.441 3.545 2.670 7.074

Std. Dev. 0.495 1.313 1.258 1.021 0.921 1.383 1.283 1.385 1.297 1.468 3.014

Min 0 1 3.2 -2.667 1 1 1 1 1 0.024 0

Max 1 5 8.3 0 5 5 5 5 5 7.086 13.122

Note: * p<.01

131

4.5.2 Second stage: offshore outcomes


In the ORN survey, firms are asked “To what extent do you agree that offshoring has

measurably led to the following outcomes?”, using the original score (ranging from 1 to

5, which represent strongly disagree to strongly agree). The outcomes include “better

focus on core competencies” (out_corecmpt), “better access to qualified personnel”

(out_aqp), “improved organisational flexibility” (out_orgflex), “increase in firm's

overall competitiveness” (out_compete), “increased productivity/efficiency”

(out_prodeff), “improved service quality” (out_servqual), “better access to new

markets” (out_newmark), and “breakthrough process improvement(s)” (out_ procimpr).

4.5.2.2 Explanatory variables

One of the aims of this paper is to test the effect institutional factors of firm’s host

countries have on achieving certain offshore outcomes. Therefore, variables that reflect

the quality of host country’s legal system and IPR protection (i.e., host_ipri and

host_ipr) which are adopted in first stage test are also included in second stage tests.

The other aim of this paper is to test whether the governance misalignment affects the

achievement of certain outcomes, therefore, we created two dummy variables which

represent the governance misalignment which are included in the explanatory variables.

Following Elia et al. (2014) and Leiblein et al. (2002), we first calculated the predicted

governance misalignment from the first‐stage probit regression as a continuous variable

(which ranges from 0 to 1), equal to Φ in the case of outsourcing and to 1 − Φ in the

case of captive, where Φ is the standard normal cumulative distribution function defined

as follows:

Prob(Yi=1)=Φ(β′Xi)

Two dummy variables are then created: failure to select outsourcing (fail_out), equal to

‘1’ when the predicted mode was outsourcing and the actual one captive (i.e., 1-

Φ > 0.5), and ‘0’ otherwise; Failure to select captive (fail_cap), equal to ‘1’ when the

predicted mode was captive and the actual one outsourcing (i.e., Φ > 0.5). and ‘0’

otherwise.)

132

4.5.2.3 Control variables

Some of the factors which are used in the first stage are also used as control variables in

the second stage test: these are firm size, cultural distance, host country dummies, and

industry dummies. Access to talent is an important driving force behind offshoring

innovation decisions (Lewin, et al., 2009), so we calculated the average number of R&D

researchers of host countries 3 years prior to the survey year, and then log transformed

this variable to represent the size of the talent pool in host countries (host_res) as one of

the control variables. In order to control for self-selection bias, we compute the inverse

Mills ratio λ based on first stage test, which is included as a control variable in the

second stage. We also include governance mode as control variables, so that we can

estimate the influence of governance choices on offshore outcome. Detailed variable

descriptions are shown in Table 4.5.

Table 4.5: Variable description (second stage) Variable name Value Data source

Dependent

variable

out_corecmpt Better focus on core competencies ORN survey

out_aqp Better access to qualified personnel ORN survey

out_orgflex Improved organisational flexibility ORN survey

out_compete Increase in firm's overall competitiveness ORN survey

out_prodeff Increased productivity/efficiency ORN survey

out_servqual Improved service quality ORN survey

out_newmark Better access to new markets ORN survey

out_procimpr Breakthrough process improvement(s) ORN survey

Explanatory

variables

fail_cap 1= Failure to select captive; 0 = Otherwise Created based

on first-stage

result

fail_out 1= Failure to select outsourcing; 0 = Otherwise Created based

on first-stage

result

host_ipri Reflects each country’s Legal and Political environment

(LP: judicial independence, rule of law, political

stability, and control of corruption), Physical Property

Rights (PPR: protection of physical property rights,

registering property, and access to loans) and

Intellectual Property Rights (IPR: protection of

intellectual property rights, patent protection, and

copyright piracy). The overall grading scale of IPRI

ranges from 0 (representing non-existence of secure

property rights in a country) to 10 (representing the

strongest level of property rights protection).

IPRI index by

Property

Rights

Alliance

133

host_ipr 0 = not on the list; -1 = on the watch list; -2 = on the

priority watch list; -3 = on the priority foreign country

list or under Section 306 Monitoring

USTR’s

Special 301

report

Control

variables

captive_mode 1 = captive mode; 0 = offshore outsourcing mode ORN survey

cul_dis Hofstede's cultural dimensions: Computed by applying

the Kogut and Singh (1988) index to the items provided

by Hofstede (2001).

Hofstede’s

index

emp_world log transformed from variable "emp_world", which

indicates the number of employees Worldwide

(including domestic). For the observations which

answered the number of employees is 0, they all treated

as missing value

ORN survey

host_res Natural log of the total number of researchers in R&D in

host countries

World Bank

database

host_country_

dummy

China; India; Western developed countries (Austria,

Canada, Finland, France, Germany, Greece, Ireland,

Italy, Luxembourg, Netherlands, Norway, Portugal,

Spain, Sweden, Switzerland, United Kingdom, US);

South East Asia (Malaysia, Philippine); Other developed

regions (Australia, Japan, Korea, Singapore); Latin

America (Argentina, Brazil, Colombia, Mexico);

Eastern Europe (Poland, Russia, Slovakia, Ukraine)

(reference variable).

ORN survey

Industry_dummy financial/insurance/banking services;

health/biotech/pharma/chemical; manufacturing;

professional services; software and programming,

business/IT services, telecommunication, and

electronics; high tech and technical services; other

industries (aerospace, agriculture, automotive, retail,

utilities, transportation, etc.) (reference variable).

ORN survey

The descriptive statistics and the correlation matrix of the variables included in second

stage analysis are presented in Table 4.6. All correlation coefficients are below 0.6, and

no strong correlations are observed between variables. We also computed the VIF to

check the potential multicollinearity problems. The range of VIF scores of the

independent variables is between 1.26 and 3.61 (governance mode), which indicates

absence of collinearity (lower than 10) (Wooldridge, 2012).

134

Table 4.6: Descriptive statistics and correlations for explanatory and control variables （second stage）

Variable 1a 1b 1c 1d 1e 1f 1g 1h 2 3 4 5 6 7 8 9

1a Core competencies 1.000

1b Access to qualified personnel 1.000

1c Organisational flexibility 1.000

1d Firm's overall competitiveness 1.000

1e Increased productivity/efficiency 1.000

1f Improved service quality 1.000

1g Better access to new markets 1.000

1h Breakthrough process improvement(s) 1.000

2 fail_cap -0.066 -0.018 0.124 0.035 -0.269* -0.099 0.021 -0.047 1.000

3 fail_out -0.148 -0.163 -0.159 -0.084 -0.057 -0.048 -0.085 -0.019 -0.135 1.000

4 captive_mode -0.017 -0.263* -0.263 0.066 -0.039 -0.078 0.153 0.021 -0.306* 0.441* 1.000

5 host_ipri 0.219* 0.032 0.006 -0.014 0.011 0.106 0.272* 0.107 0.040 -0.058 0.166 1.000

6 host_ipr 0.195 -0.005 0.126 0.090 -0.083 0.052 0.164 0.116 0.025 -0.023 0.041 0.334* 1.000

7 cul_dis -0.044 0.018 0.081 -0.001 -0.065 -0.120 -0.108 -0.088 0.009 -0.098 0.009 -0.567* 0.027 1.000

8 host_res 0.278* 0.095 0.169 0.202 0.115 0.097 0.236* 0.172 0.071 -0.146 0.177 0.396* 0.515* 0.071 1.000

9 emp_world -0.031 -0.169 -0.127 0.011 -0.169 0.099 0.012 0.069 0.076 0.022 0.149 -0.035 -0.066 -0.040 -0.285* 1.000

Obs . 161 161 161 160 161 161 161 161 202 202 202 202 202 202 202 202

Mean 3.416 3.696 3.671 3.606 3.491 3.081 2.627 2.385 0.114 0.124 0.421 5.240 -1.417 2.670 6.190 7.074

Std. Dev. 0.965 0.975 0.941 1.041 1.079 1.049 1.345 1.084 0.318 0.330 0.495 1.258 1.021 1.468 1.372 3.014

Min 1 1 1 1 1 1 1 1 0 0 0 3.2 -2.667 0.024 4.359 0

Max 5 5 5 5 5 5 5 5 1 1 1 8.3 0 7.086 8.947 13.122

Note: * p<.01

135

4.5.3 First stage results: Factors behind offshore governance choices

In this section, we focus on innovation activities, and estimate the effects institutional

factors (i.e., IPR protection strength and the quality of rule of law in host countries) and

concern about IPR protection in host countries have on offshore governance choices.

Since the dependent variable is a binary variable, the probit model is adopted to

estimate these relationships.

Model 1 in Table 4.7 shows the first-stage probit regression results. It can be noted that

the quality of rule of law in host countries is positively related to the probability of

choosing captive mode, while the IPR protection strength in host countries is negatively

related to captive mode. With regard to the influences of control variables, firms

offshoring innovation as part of a global strategy are more likely to choose captive

mode. Firm size is also positively related to the probability of choosing captive mode.

However, increasing speed to market increases the probability of choosing offshore

outsourcing. In addition, firms that operate in financial services/insurance/banking

services industries, the probability of choosing offshore outsourcing mode is higher,

while firms that operate in health/biotech/pharma/chemical and high tech and technical

services industries are more likely to adopt captive mode.

In summary, the regression results show that the quality of rule of law in host countries

is positively related to the probability of choosing captive, while the IPR protection

strength in host countries is negatively related to choosing captive. It can be noted that

if firms offshore for increasing speed to market, there is a higher probability that firms

will choose outsourcing. Larger firms offshoring innovation as part of a global strategy,

are more likely to choose captive. In addition, firms that operate in industries like

health/biotech/pharma/chemical and high tech and technical services are more likely to

choose captive.

136

Table 4.7: First-stage: governance choices (probit regression model) Model 1

risk_iploss -0.145 (0.101)

host_ipri 0.894** (0.293)

host_ipr -1.044* (0.489)

Control

driv_cost -0.163 (0.127)

driv_newmark 0.110 (0.102)

driv_aqp -0.115 (0.097)

driv_globstr 0.222* (0.105)

driv_speed2m -0.274** (0.103)

cul_dis -0.116 (0.124)

emp_world 0.133** (0.043)

China -3.125* (1.371)

India -4.286** (1.275)

Western developed countries -3.825** (1.275)

South East Asia -1.391* (0.628)

Far East developed countries -3.900* (1.529)

Latin America -2.915* (1.155)

financial/insurance/banking services -1.056† (0.540)

health/biotech/pharma/chemical 0.676 (0.484)

manufacturing -0.098 (0.412)

professional services -0.298 (0.559)

software and programming, business/IT services,

telecommunication, and electronics

0.465 (0.373)

high tech and technical services 0.652† (0.374)

_cons -2.498 (1.541)

N 202

LR chi2 (32) 79.64

Prob > chi2 0.000

Pseudo R2 0.290

Log likelihood -97.649

Standard errors in brackets. Significance levels: † p<0.10, * p<0.05, ** p<0.01, *** p<0.001

4.5.4 Second stage results: The relationships between the governance

misalignment, the institutional factors, and the achievement of certain outcomes

This section shows the results of the second-stage regression, which tests whether the

governance misalignment and institutional factors affect achieving certain outcomes

when offshoring innovation. In particular we regress “improved service quality”, “better

focus on core competencies”, “better access to qualified personnel”, “improve

organisational flexibility”, “increase in firm’s overall competitiveness”, “better access

to new market”, and “breakthrough process improvement(s)” on governance

misalignment, the quality of rule of law and the IPR protection strength in host

countries. Following Elia et al. (2014), the results with and without the inverse Mills

ratio (self-selection correction) are reported in each model respectively. To show

137

whether unobserved firm characteristics affect governance choice and performance. It

can be noted that in some models the inverse Mills ratio has significant effect.

Therefore, the discussion of regression results of each outcome will be focused on the

models with inverse Mills ratio in below.

Outcomes: “better focus on core competencies” and “better access to qualified

personnel”

Table 4.8 shows the regression results regarding the relationships between the

influencing factors and the achievement of “better focus on core competencies” (Model

2) and “better access to qualified personnel” (Model 3). It can be noted that “failure to

select outsourcing mode” has a significant negative impact on the probability of

achieving the outcome of focusing on core competencies. Regarding the influences of

institutional factors, Model 2 shows that the quality of rule of law in host countries is

positively related to the probability of achieving the outcome of focusing on core

competencies, while the IPR protection strength in host countries is negatively related to

this outcome. The regression results also show that the bigger the firm size, the higher

the probability to achieve “better focus on core competencies”. In addition, firms that

offshore innovation activities to China, Western developed countries, Far East

developed countries, Latin America, and firms that operate in

financial/insurance/banking services industries are less likely to achieve this outcome,

while firms that operate in professional services are more likely to do so.

Model 3 shows that “failure to select outsourcing model” and the IPR protection

strength in host countries have a negative effect on the probability of achieving the

outcome “better access to qualified personnel”. It can be noted that firms that operate in

professional services and “software and programming, business/IT services,

telecommunication, and electronics” industries are more likely to achieve this outcome.

138



qualified personnel” Core competencies

(Model 2)

Access to qualified personnel

(Model 3)

Without Mills ratio With Mills ratio Without Mills ratio With Mills ratio

fail_cap -0.683* (0.322) -0.073 (0.375) -0.102 (0.320) 0.516 (0.379)

fail_out -0.197 (0.334) -0.657† (0.365) -0.275 (0.332) -0.730* (0.365)

host_ipri 0.399 (0.275) 0.744* (0.296) -0.256 (0.271) 0.047 (0.288)

host_ipr -0.139 (0.354) -0.687† (0.393) -0.210 (0.351) -0.737† (0.392)

Control

captive_mode -0.347 (0.294) 0.315 (0.360) -0.343 (0.293) 0.305 (0.362)

cul_dis 0.000 (0.117) -0.087 (0.121) 0.197† (0.118) 0.126 (0.121)

host_res 0.353 (0.424) 0.389 (0.425) 0.273 (0.421) 0.302 (0.421)

emp_world 0.019 (0.041) 0.075† (0.045) -0.029 (0.041) 0.024 (0.044)

mills 1.014** (0.317) 0.981** (0.320)

China -0.638 (1.109) -2.167† (1.210) 0.279 (1.097) -1.150 (1.194)

India -0.575 (1.675) -2.418 (1.774) 1.406 (1.656) -0.280 (1.746)

Western developed countries -1.076 (1.021) -2.573* (1.127) 2.098* (1.007) 0.816 (1.091)

South East Asia 0.116 (1.340) 0.127 (1.347) 1.131 (1.321) 0.926 (1.326)

Far East developed countries -2.340† (1.196) -3.876** (1.296) 1.362 (1.170) 0.048 (1.249)

Latin America -0.197 (0.953) -1.946† (1.100) 0.894 (0.943) -0.742 (1.086)

financial/insurance/banking services -0.558 (0.418) -1.559** (0.525) 0.552 (0.421) -0.355 (0.516)

health/biotech/pharma/chemical -0.008 (0.476) 0.314 (0.490) -0.256 (0.475) 0.037 (0.488)

manufacturing -0.417 (0.341) -0.502 (0.344) -0.121 (0.332) -0.194 (0.335)

professional services 1.073† (0.568) 1.226* (0.569) 1.094† (0.591) 1.278* (0.598)

software and programming, business/IT

services, telecommunication, and

electronics

-0.492 (0.300) -0.369 (0.304) 0.398 (0.294) 0.554† (0.300)

high tech and technical services 0.064 (0.363) 0.358 (0.376) 0.160 (0.356) 0.110 (0.367)

cut 1 1.444 (3.090) 4.311 (3.232) -0.413 (3.053) 2.312 (3.190)

cut 2 2.346 (3.091) 5.278 (3.247) 0.774 (3.044) 3.527 (3.192)

cut 3 3.392 (3.094) 6.368 (3.247) 1.643 (3.048) 4.433 (3.192)

cut 4 4.959 (3.104) 7.977 (3.261) 2.984 (3.051) 5.824 (3.201)

N 161 161 161 161

LR chi2 (32) 40.65 51.01 34.05 43.62

Prob > chi2 0.004 0.000 0.026 0.003

Pseudo R2 0.094 0.118 0.079 0.101

Log likelihood -196.205 -191.025 -197.995 -193.211


139

Outcomes: “improved organisational flexibility” and “increase in firm's overall

competitiveness”

Model 4 in Table 4.9 tests the relationships between the influencing factors and the

achievement of “improved organisational flexibility”. The results show that “failure to

select captive model” is positively related to the probability of achieving the outcome of

improving organisational flexibility, while “failure to select outsourcing mode” has a

negative effect. It can also be noted that the institutional factors have no significant

effect on achieving this outcome, but the number of R&D researchers in host countries

is positively related to the probability of achieving this outcome. In addition, firms that

offshore innovation activities to South East Asia, and firms that operate in

manufacturing and professional services industries are more likely to improve

organisational flexibility.

The regression results in Model 5 shows that “failure to select outsourcing mode” and

the quality of rule of law in host countries are negatively related to the probability of

achieving the outcome of increasing firm’s overall competitiveness. However, “failure

to select captive mode” has positive effect on achieving this outcome. The IPR

protection strength in host countries has no significant effect on this achievement.

About the control variables, the results show that firms that choose captive mode are

more likely to achieving this outcome. Furthermore, firms offshoring innovation to

China, India, Western developed countries, and Latin America are more likely to

achieve this outcome. However, firms that operate in “financial/insurance/banking

services”, “manufacturing”, “health/biotech/pharma/chemical”, and “high tech and

technical services” industries are less likely to achieve this outcome.

140


achieving the outcomes of “improved organisational flexibility” and “increase in firm's

overall competitiveness”. Organisational flexibility

(Model 4)

Firm's overall competitiveness

(Model 5)


fail_cap 0.546 (0.334) 1.173** (0.396) 0.600† (0.326) 0.804* (0.380)

fail_out -0.224 (0.336) -0.670† (0.371) -0.657† (0.349) -0.798* (0.375)

host_ipri -0.485† (0.277) -0.186 (0.295) -0.777** (0.276) -0.675* (0.293)

host_ipr 0.434 (0.359) -0.034 (0.395) 0.737* (0.358) 0.553 (0.398)

Control

captive_mode -0.254 (0.293) 0.389 (0.365) 0.777* (0.307) 0.989** (0.369)

cul_dis 0.038 (0.121) -0.038 (0.124) -0.122 (0.120) -0.153 (0.124)

host_res 0.875† (0.456) 0.924* (0.461) 0.659 (0.426) 0.672 (0.426)

emp_world -0.086* (0.041) -0.036 (0.044) 0.011 (0.041) 0.031 (0.045)

mills 0.969** (0.327) 0.328 (0.314)

China 1.743 (1.128) 0.471 (1.211) 2.563* (1.121) 2.065† (1.215)

India 3.434* (1.742) 1.921 (1.821) 3.693* (1.678) 3.100† (1.770)

Western developed countries 1.140 (1.004) -0.163 (1.096) 2.417* (1.016) 1.950† (1.111)

South East Asia 2.595† (1.446) 2.471† (1.467) 1.676 (1.325) 1.613 (1.326)

Far East developed countries 0.850 (1.184) -0.470 (1.269) 1.675 (1.167) 1.222 (1.246)

Latin America 1.662† (0.985) 0.195 (1.110) 2.418* (0.964) 1.853† (1.103)

financial/insurance/banking services 0.736† (0.420) -0.166 (0.520) -0.930* (0.420) -1.248* (0.520)

health/biotech/pharma/chemical

0.276 (0.474) 0.587 (0.488) -2.113*** (0.537) -2.052***

(0.542)

manufacturing 1.251*** (0.349) 1.248*** (0.353) -0.629† (0.348) -0.652† (0.348)

professional services 1.240* (0.554) 1.409* (0.558) 0.834 (0.570) 0.886 (0.572)



electronics

0.218 (0.296) 0.368 (0.302) -0.448 (0.311) -0.395 (0.314)

high tech and technical services -0.430 (0.359) -0.157 (0.372) -0.974* (0.376) -0.874* (0.387)

cut 1 1.498 (3.335) 4.287 (3.509) -1.079 (3.054) -0.174 (3.174)

cut 2 2.823 (3.311) 5.676 (3.491) -0.028 (3.054) 0.910 (3.183)

cut 3 3.872 (3.311) 6.756 (3.493) 0.793 (3.055) 1.744 (3.187)

cut 4 5.257 (3.319) 8.192 (3.507) 2.169 (3.056) 3.116 (3.187)

N 161 161 160 160

LR chi2 (32) 50.43 59.45 52.49 53.58

Prob > chi2 0.000 0.000 0.000 0.000

Pseudo R2 0.118 0.140 0.118 0.120

Log likelihood -187.675 -183.163 -196.520 -195.977


141

Outcomes: “Increased productivity/efficiency” and “Improved service quality”

Model 6 in Table 4.10 presents the regression results for the achievement of increasing

productivity/efficiency via offshoring innovation activities. It can be noted that “failure

to select captive mode” is negatively related to the probability of achieving this

outcome, while the number of R&D researchers in host countries is positively related to

this outcome. Other explanatory variables do not have significant effects.

Results for Model 7 show that when the quality of rule of in host countries is better, the

probability of achieving the outcome of improving service quality will be lower. Failure

to select captive mode, failure to select outsourcing mode, and the IPR protection

strength of host countries do not have significant effects on achieving this outcome.

Regarding the control variables, the regression results show that the number of R&D

researchers in host countries is positively related to the probability of achieving the

outcome improving service quality. In addition, firms that offshored innovation

functions to India, Western developed countries, South East Asia, Far East developed

countries, Latin America, and firms that operate in manufacturing and professional

services industries are more likely to achieve such outcome.

142



quality”.


(Model 6)


(Model 7)


fail_cap -1.097** (0.324) -0.745* (0.372) -0.443 (0.319) -0.284 (0.370)

fail_out -0.056 (0.333) -0.325 (0.361) -0.070 (0.336) -0.187 (0.363)

host_ipri -0.381 (0.267) -0.195 (0.284) -0.981** (0.289) -0.897** (0.304)

host_ipr -0.179 (0.349) -0.497 (0.386) -0.189 (0.353) -0.327 (0.388)

Control

captive_mode -0.369 (0.291) 0.022 (0.354) -0.221 (0.291) -0.049 (0.355)

cul_dis -0.124 (0.116) -0.178 (0.120) -0.097 (0.116) -0.120 (0.119)

host_res 0.783† (0.422) 0.808† (0.422) 1.421** (0.429) 1.429** (0.429)

emp_world -0.025 (0.040) 0.008 (0.044) 0.016 (0.040) 0.030 (0.043)

mills 0.596† (0.307) 0.257 (0.304)

China 0.652 (1.095) -0.205 (1.182) 1.027 (1.128) 0.643 (1.213)

India 1.876 (1.645) 0.851 (1.728) 4.434* (1.718) 3.975* (1.796)

Western developed countries 0.938 (0.981) 0.126 (1.069) 2.886** (1.070) 2.515* (1.151)

South East Asia 1.933 (1.311) 1.829 (1.314) 4.487** (1.359) 4.428** (1.359)

Far East developed countries 0.651 (1.146) -0.160 (1.223) 3.151* (1.225) 2.784* (1.296)

Latin America 0.927 (0.932) -0.072 (1.066) 2.273* (0.971) 1.832† (1.100)

financial/insurance/banking services 0.150 (0.409) -0.409 (0.501) 0.455 (0.410) 0.210 (0.502)

health/biotech/pharma/chemical -0.329 (0.476) -0.148 (0.486) -0.218 (0.471) -0.142 (0.480)

manufacturing -0.016 (0.334) -0.051 (0.335) 0.739* (0.335) 0.722* (0.336)

professional services 0.812 (0.555) 0.910 (0.556) 1.929** (0.591) 1.966** (0.593)



electronics

0.297 (0.298) 0.399 (0.303) -0.072 (0.293) -0.037 (0.296)

high tech and technical services 0.334 (0.362) 0.518 (0.375) 0.263 (0.355) 0.340 (0.367)

cut 1 1.819 (3.056) 3.511 (3.184) 4.808 (3.026) 5.534 (3.156)

cut 2 2.551 (2.060) 4.270 (3.193) 6.169 (3.033) 6.902 (3.154)

cut 3 3.590 (3.068) 5.326 (3.202) 7.351 (3.046) 8.089 (3.169)

cut 4 4.705 (3.071) 6.447 (3.206) 8.291 (3.053) 9.028 (3.176)

N 161 161 161 161

LR chi2 (32) 39.99 43.77 54.79 55.5

Prob > chi2 0.005 0.003 0.000 0.000

Pseudo R2 0.086 0.095 0.119 0.121

Log likelihood -211.499 -209.611 -202.863 -202.506


Outcomes: “Better access to new markets” and “Breakthrough process improvement(s)”

Model 8 focuses on analysing the influencing factors behind the achievement of “better

access to new markets”. It can be noted that “failure to select outsourcing” and the

quality of rule of law in host countries are negatively related to probability of achieving

the outcome. As for control variables, the regression results show that firms that choose

143

captive mode are more likely to achieve this outcome. Firms that offshored innovation

activities to China, India, Western developed countries, Far East developed countries

and Latin America, as well as firms that operate in manufacturing and professional

services industries are more likely to achieve this outcome, while firms that operate in

health/biotech/pharma/chemical industries are less likely to achieve the outcome.

The regression results in Model 9 show that the quality of rule of law in host countries

is negatively related to the probability of achieving the outcome “breakthrough process

improvement(s)”. Regarding the control variables, it can be noted that the number of

R&D researchers in host countries is positively related to achieving this outcome, as

well as firms that offshored innovation activities to India, South East Asia, and Latin

America, and firms that operate in professional services industries are also more likely

to achieve this outcome.

144



improvement(s)”.


(Model 8)

Breakthrough process

improvement(s)

(Model 9)


fail_cap 0.641* (0.319) 0.562 (0.373) -0.103 (0.320) 0.308 (0.375)

fail_out -0.721* (0.336) -0.665† (0.363) -0.076 (0.340) -0.373 (0.369)

host_ipri -0.536† (0.288) -0.581† (0.308) -0.826** (0.310) -0.609† (0.320)

host_ipr 0.531 (0.353) 0.601 (0.392) 0.456 (0.351) 0.110 (0.387)

Control

captive_mode 0.863** (0.298) 0.780* (0.361) 0.095 (0.299) 0.542 (0.368)

cul_dis -0.019 (0.118) -0.010 (0.120) -0.114 (0.117) -0.174 (0.120)

host_res 0.292 (0.421) 0.292 (0.422) 1.164** (0.432) 1.187** (0.431)

emp_world -0.063 (0.041) -0.070 (0.045) -0.003 (0.041) 0.033 (0.045)

mills -0.129 (0.317) 0.657* (0.312)

China 2.442* (1.128) 2.643* (1.233) 2.568* (1.166) 1.600 (1.240)

India 3.242† (1.710) 3.488† (1.816) 4.698** (1.796) 3.521† (1.857)

Western developed countries 3.246** (1.086) 3.436** (1.185) 2.688* (1.175) 1.709 (1.235)

South East Asia 2.142 (1.342) 2.190 (1.349) 3.843** (1.408) 3.673** (1.396)

Far East developed countries 3.337** (1.244) 3.527** (1.331) 1.845 (1.303) 0.859 (1.360)

Latin America 2.643** (0.982) 2.866* (1.126) 3.051** (1.018) 1.942† (1.134)

financial/insurance/banking services -0.274 (0.429) -0.146 (0.531) -0.117 (0.420) -0.754 (0.518)

health/biotech/pharma/chemical -1.058* (0.508) -1.088* (0.512) -0.718 (0.501) -0.563 (0.512)

manufacturing 0.974** (0.340) 0.984** (0.341) 0.390 (0.336) 0.344 (0.338)

professional services 1.091* (0.553) 1.076† (0.555) 1.744** (0.573) 1.851** (0.575)



electronics

-0.138 (0.293) -0.155 (0.296) -0.447 (0.296) -0.366 (0.298)

high tech and technical services -0.167 (0.355) -0.203 (0.367) 0.127 (0.358) 0.315 (0.369)

cut 1 0.065 (3.008) -0.281 (3.126) 4.396 (3.055) 6.263 (3.185)

cut 2 0.734 (3.010) 0.390 (3.126) 5.159 (3.059) 7.042 (3.191)

cut 3 1.544 (3.011) 1.200 (3.126) 6.268 (3.069) 8.181 (3.206)

cut 4 2.250 (3.011) 1.904 (3.128) 8.038 (3.101) 9.842 (3.234)

N 161 161 161 161

LR chi2 (32) 62.59 62.76 50.39 54.84

Prob > chi2 0.000 0.000 0.000 0.000

Pseudo R2 0.125 0.125 0.111 0.121

Log likelihood -220.133 -220.049 -201.393 -199.165


To summarise the regression results (Table 4.12), we found that failing to select captive

mode increase the probability to achieve the outcomes of improving organisational

flexibility, increasing firm’s overall competitiveness and productivity/efficiency. For

firms that fail to select outsourcing mode, the probability of achieving the outcomes of

better focusing on core competencies, accessing to qualified personnel, improving

145

organisational flexibility, and firm’s overall competitiveness is lower, while the

probability of achieving the outcome of better accessing to new markets is higher. The

quality of rule of law in host countries is positively related to the probability of

achieving the outcome of focusing on core competencies, while it is negatively related

to the probability of achieving an outcome of increasing firm’s overall competitiveness,

service quality, better accessing to new markets, and breakthrough process

improvement(s). The IPR protection strength is negatively related to the probability of

achieving the outcome of better focusing on core competencies and accessing to

qualified personnel. The results also show that bigger firms are more likely to achieve

the outcome of better focusing on core competencies. The number of R&D researchers

in host countries is also positively related to the probability of achieving the outcomes

of improving organisational flexibility, productivity/efficiency, service quality and

breakthrough process improvement(s). Firms choosing captive mode are more likely to

achieve the outcome of increasing firm’s overall competitiveness and better accessing to

new markets.

Last but not least, offshoring destinations and the industries firms operate matter when

innovation functions are offshored. For example, firms that offshored to China are more

likely to increase firm’s overall competitiveness and access to new markets, while are

less likely to focus on core competencies. Firms that offshored to India and Latin

America are more likely to achieve the outcomes of increasing firm’s overall

competitiveness, improved service quality, better access to new markets, and

breakthrough process improvement(s), but less likely to better focus on core

competencies. As for firms that offshored innovation activities to Western developed

countries and Far East developed countries, they are more likely to achieve the

outcomes of improving service quality and accessing to new markets, and firms that

offshored to Western developed countries are also more likely to increase firm’s overall

competitiveness. However, they are less likely to focus on core competencies. Firms

that operate in health/biotech/pharma/chemical are less likely to achieve the outcomes

of increasing firm’s overall competitiveness and accessing to new markets , and firms

who operate in financial/insurance/banking services are less likely to increase firm’s

overall competitiveness and focus on core competencies. Firms in manufacturing

industries are more likely to achieve the outcomes of improving organisational

flexibility, service quality and accessing to new markets, but less likely to increase

146

firm’s overall competitiveness. Firms in professional services industries are more likely

to achieve all these outcomes except increasing firm’s overall competitiveness and

productivity/efficiency. Firms in software and programming/business/IT

services/telecommunication/electronics industries are more likely to access to qualified

personnel, but firms in high-tech and technical services are less likely to increase firm’s

overall competitiveness.

Table 4.12: Summary of the regression results.

Dependent variables

Core

competencies

Access to

qualified

personnel Organisa-

tional

flexibility

Firm's

overall

competitive-

ness

Increased

productivity

/efficiency

Improved

service

quality

Better

access to

new

markets

Break-

through

process

improve-

ment(s)

fail_cap + + + fail_out - - - - + host_ipri + - - - -

host_ipr - - Control

captive_ mode + + cul_dis host_res + + + +

emp_world + mills + + + + +

+: positively related; ‒: negatively related

4.5.5 Robustness Checks

We conducted robustness checks by adopting an indicator developed by Park (2008)

which measures the strength of IPR protection of firm’s home country and host country,

which is available only for the years 1960-1990 (average), 1995, 2000, and 2005. Since

the surveys covered in our sample range from 2007 to 2011, we used the 2005 value of

this indicator in the tests. Regarding the variable that measures the quality of rule of law

of host country, we adopt the variable defined by Kaufmann et al., which reflects

agents’ degree of confidence in and abide by the rules of society, and which mainly

refers to quality of contract enforcement, property rights, the police, and the courts, as

well as the likelihood of crime and violence (Kaufmann, et al., 2003). The results

reported in Appendix B1 show that most of the findings are supported, except that the

effects IPR protection strength of host country has on achieving the outcomes changed

from negative to not significant (e.g., better focus on core competencies, and better

147

access to qualified personnel), and from not significant to negative (e.g., improved

organisational flexibility, better access to new markets, and breakthrough process

improvement(s)). The effects quality of rule of law has on achieving the outcomes of

increasing firm’s overall competitiveness, improving service quality, better accessing to

new markets and breakthrough process improvement(s) changed from negative to not

significant, and the effect on achieving the outcome of increasing

productivity/efficiency changed from not significantly related to positively related. This

could be attributed to the fact that different aspects of the IPR regime and legal system

may be captured by different proxies. For example, the IPR protection variable used in

the main test in this section reflects US government’s view about the IPR regime of

other countries, while the indicator developed by Park are mostly focused on aspects of

IP law (Brander, et al., 2017). The rule of law variable developed by Kaufmann and

colleagues mainly reflects agent’s perception of the country’s legal system with regard

to contract enforcement, property rights, police and courts, while the rule of law

variable used in the main test not only include the Kaufmann index, but also include

varied indicators which reflects the quality of rule of law from three main aspects (legal

and political environment, physical property rights, and IPR). Indeed, we selected these

variables for our main regression because they cover a longer time period (IPR), include

a longer number of indicators (rule of law), and the IPRI index provided better fit in

terms of R-square. We conclude that the results of our main regression models need to

be interpreted with a full understanding of the dimensions captured by the two

institutional variables.

4.6 Discussion and conclusion

This paper analyses the relationships between factors that affect governance choices

when firms offshore innovation activities. Previous studies have stated that poor legal

protection strength in host countries represents one of the most severe risks that firms

need to consider when making offshoring decisions (Nassimbeni, et al., 2012). Some

researchers have observed that firms prefer a more hierarchical governance mode when

the legal protection is weak, while offshore outsourcing is preferred when IPR

protection strength in host countries is strong, especially when offshoring innovation

activities (Kshetri, 2007; Oxley, 1999). Our regression results support the results of

previous studies, such as outsourcing being preferred when the IPR protection strength

148

in host countries is stronger for innovation activities. However, our results also revealed

something different, such as that the quality of rule of law in host countries is positively

related to the probability of choosing captive mode.

The rule of law (legal protection) in host countries protects both property rights89 and

contract enforcement (Jain, et al., 2008). Strategic investment in assets, such as

machinery or brands, is at risk where rule of law is weak (Levie & Autio, 2011). Since

captive mode requires heavy investments of financial and managerial resources, which

in turn increases the price firms need to pay if they fail (Hutzschenreuter, et al., 2011), a

weak legal protection system in host countries could increase the risks firms face when

choosing a captive mode to operate innovation functions. This could be an explanation

for our results, and also supports the integration of TCE and institutional theory to

analyse the choices of firm boundaries. It can also be noted that increasing speed to

market is negatively related to the probability of choosing captive mode, while the

importance of being part of firm’s global strategy is positively related to choosing

captive. The results justified our conceptual framework that TCE, RBV, and

institutional theory should be integrated when analysing the firm’s offshore governance

choices.

After identifying the factors behind the governance choices, we further tested the

influence of governance misalignment and institutional factors on achieving certain

outcomes when offshoring innovation activities. Previous studies have stated that firms

need to adopt the suitable governance mode that is contingent with firms’ resources,

transaction characteristics, and local context (Brouthers, 2002; Leiblein, et al., 2002).

However, our analysis show that the governance misfit does not always hurt firm’s

performance, i.e., failure to select captive mode is positively related to the probability of

achieving the outcomes of improving organisational flexibility, increasing firm’s overall

competitiveness and productivity/efficiency”. Elia and colleagues (2014) stated that

governance misalignment has an asymmetric impact on performance, and our results

support their findings. Indeed, while failing to select captive mode may damage internal

knowledge protection, selecting outsourcing instead does improve organisational

flexibility and offers opportunities for efficiencies.

89 “As the set of economic and social relations defining the position of each individual with respect to the

utilization of scarce resource” as property rights, and it is stated that both trade of property rights and

production involve contractual arrangements (Furubotn & Pejovich, 1972).

149

Our results show that failure to select outsourcing mode mostly has negative effect

(except the outcome of better accessing to new markets), while failure to select captive

mode has positive firm performance. Scholars have stated that collaborations with

suppliers via offshore outsourcing can offer firms access to new resources (which

include the talent resources and technological resources from suppliers in host

countries), better focusing on core competencies by outsourcing peripheral business

activities, as well as enhancing focal firms’ flexibility (Bertrand, 2011; Kedia & Lahiri,

2007; Contractor, et al., 2010; Javalgi, et al., 2009). Our results support these statements

by showing that firms who fail to adopt outsourcing are less likely to achieve the

outcome of better focus on core competencies, better access to personnel, improving

organisational flexibility, and increase firm’s overall competitiveness. When the firm

establishes a wholly owned subsidiary, its presence in that country could still help the

firm to gain better access to this market even though our model recommends

outsourcing mode to this implementation. This could explain why failure to select

outsourcing mode is positively related to achieving the outcome of better access to new

markets.

Regarding failure to select captive mode, our results show that the probability of

achieving the outcomes of improving organisational flexibility, increasing firm’s overall

competitiveness, and productivity/efficiency will be higher. We do not know if firms in

our sample have experience of outsourcing or not, but we do know that the outsourcing

industry has developed tremendously, and service providers have become more

competitive and experienced (Lacity, et al., 2009). Therefore, selecting outsourcing

when the model predicted to select captive may still deliver some efficiencies and allow

to achieve certain performance outcomes (Quinn, 2000). This may explain why failure

to select captive mode can still increase the probability of achieving such outcomes,

which is consistent with the TCE theory. In addition, previous studies have stated that

excessive offshore outsourcing of advanced activities may hollow out firms’

competitive bases and increase dependency on providers (Paju, 2007; Grimpe & Kaiser,

2010; Kotabe, et al., 2008). However, if the innovation activities offshored to other

countries are not firms’ core technologies, failure to select captive mode may not

necessarily bring losses to firms; instead, firms may achieve the benefits that

outsourcing can bring.

150

The relationships between failure to select outsourcing mode, failure to select captive

mode and the firm performance may also indicate that it is comparatively more

important to choose outsourcing mode as the model predicted, since failure to select

outsourcing mode is mostly negatively related to the achievement of varied outcomes,

while failure to select captive mode can still bring certain types of benefits.

Our regression results show that if the rule of law in host countries is better, firms are

more likely to achieve the outcome of focusing on core competencies, but less likely to

achieve the outcomes of improving firm’s overall competitiveness, service quality,

accessing to new markets, and breakthrough process improvement(s). Previous studies

also identified a positive relationship between the economic performance and quality of

rule of law (especially property rights protection) (Barro, 2000). Countries with good

quality rule of law are normally the ones with advanced economies (Rigobon & Rodrik,

2005). Important high-end product development and engineering activities would still

be carried out in the developed economies (Manning, et al., 2008; Doh, et al., 2009),

and offshoring innovation activities to such countries could help firms to utilise the

technological resources and strengthen their core competencies, which explains the

relationship between the rule of law and the probability of better focusing on core

competencies.

Researchers argue that offshoring also provide MNEs an access to knowledge in

multiple markets and can benefit from increased diversity and heterogeneity in their

knowledge bases (Nieto & Rodríguez, 2011). Offshoring R&D activities to countries

with more specialised knowledge provides firms with location-specific resourcing and

specialisation advantages, firms can obtain better innovation inputs and enhance

innovation capabilities (Chung & Alcácer, 2002). It has also been stated that firms now

routinely adopt offshoring strategy in order to utilise time-zone differences to provide a

24-hour knowledge factory model, as well as provide “round-the-clock” support for

customers (Siems & Ratner, 2003; Bryson, 2007). At the same time, the choices of

destinations for advanced activities offshoring have also evolved from developed

countries to developing countries (Massini & Lewin, 2012). Among the different

offshoring destinations, it is argued that Asia has been playing a central role in the

growing global innovation networks (Ernst, 2006), and researchers have also identified

that emerging economies have taken a leading position in attracting global service

offshoring and innovation offshoring. Offshoring innovation activities to the emerging

151

countries not only provides firms “round-the-clock” services to its product development

and customer services, opening new markets to firms, but it also offers firms the

specific locational resources and enhanced innovation capabilities. However, these

countries normally do not possess strong and complete legal systems, which could

explain why the quality of rule of law in host countries is negatively related to the

probability of increasing firm’s overall competitiveness, improving service quality,

accessing to new markets, and achieving breakthrough process improvement(s).

Our results also show that IPR protection strength in host countries is negatively related

to the probability of achieving outcomes of better accessing to qualified personnel and

focusing on core competencies. Firms are seeking talent in emerging countries because

developed countries lack enough science and engineering graduates (Massini & Lewin,

2012; Lewin, et al., 2009), and this is an important driver behind offshoring innovation

activities. Weak intellectual protection regimes are a concern in many emerging

economies (Bardhan & Jaffee, 2005), which may explain why IPR protection strength

in host countries is negatively related to the probability of achieving an outcome of

better accessing to qualified personnel. Although firms will face the risk that

competitors may steal their intellectual property and proprietary processes if they

offshore innovation activities to countries with weak IPR protection (Aron & Singh,

2005), firms also gain the opportunities to learn about their competitors’ technologies in

such countries. This could explain why the quality of IPR protection in host countries is

negatively related to achieving the outcome of better focusing on core competencies. In

addition, the cheap labour and availability of talent in countries with weak IPR

protection may attract firms to offshore non-core innovation activities to these

countries, which, on the other hand, can also help firms to better focus on core

competencies.

Scholars argue that offshoring of higher skilled functions is mainly driven by

availability of qualified personnel (Bunyaratavej, et al., 2007), which can give firms of

all sizes the opportunity to source this talent which are located globally instead of

having to rely solely on domestic resources (Nieto & Rodríguez, 2011). Firms can

utilise the available pool of resources overseas and are able to improve their innovation

capabilities (Nieto & Rodríguez, 2011), which could explain that the number of R&D

researchers in host countries has positive effect on achieving the outcome of

152

breakthrough process improvement(s). Furthermore, our results also show that when

offshoring innovation activities to countries with higher number of R&D researchers,

firms are more likely to improve organisational flexibility, productivity/efficiency, and

service quality.

This study has focused on analysing the influence of institutional factors (rule of law

and IPR protection in host countries) on the offshore governance choices, especially the

influence the institutional factors and governance misalignment have on the outcomes

which can be achieved via offshoring. We believe this paper contributes to a better

understanding of offshore governance choices and the roles that institutional factors

play during offshoring, and have extended previous work regarding the relationship

between governance choices and firm performance by focusing on innovation

offshoring. The results support our conceptual framework that TCE, RBV, and

institutional theory should be integrated when analysing firm’s offshore governance

choices and the achievement of their outcomes.

The findings of this paper can provide guidance to decision makers in corporations

regarding what needs to be considered when choosing a certain governance mode, and

the role of the institutional environment of the countries they plan to offshore to. It

could also give insight to policy makers in host countries for attracting offshoring

activities by reinforcing its institutional regimes, in particular IPR and rule of law.

Regarding the limitations of this paper, although the ORN database contains

comprehensive information of offshoring, the latest survey was conducted in 2011, due

to the fast development and changes in the real business world, new updated surveys

could be designed and conducted in the future. Furthermore, the empirical analysis

treats governance choices as dichotomous, but firms may select varied governance

solutions to deal with different tasks in practice and engage in collaborations, joint

ventures, so that governance choices in reality appear as a spectrum in between the two

extremes considered in this study. However, in the ORN database there are only few

cases of such intermediate governance modes which would have not allowed for robust

analyses. In-depth interviews could also be conducted in future research to test the

validity of our findings, and filling the gaps which cannot be addressed in empirical

analysis, as well as learning how MNCs manage and coordinate their R&D activities

offshore and onshore.

153

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Appendix B1: Robustness check

Table B1.1: First-stage: governance choices (probit regression model).

Governance mode Model 10

risk_iploss -0.111 (0.099)

host_rol 1.027** (0.410)

host_ipr_park 1.003 (0.760)

Control

driv_cost -0.220† (0.129)

driv_newmark 0.132 (0.104)

driv_aqp -0.124 (0.099)

driv_globstr 0.210† (0.107)

driv_speed2m -0.265* (0.104)

cul_dis 0.128** (0.044)

emp_world -0.122 (0.126)

China 0.111 (0.500)

India -1.350* (0.579)

Western developed countries -3.308** (1.093)

South East Asia -0.963 (0.611)

Far East developed countries -3.034* (1.258)

Latin America -1.242 (0.769)

financial/insurance/banking services -1.069† (0.577)

health/biotech/pharma/chemical 0.797† (0.474)

manufacturing 0.079 (0.401)

professional services -0.124 (0.565)

software and programming, business/IT services,

telecommunication, and electronics

0.670† (0.373)

high tech and technical services 0.697† (0.375)

_cons -2.555 (3.067)

N 202

LR chi2 (32) 78.43

Prob > chi2 0.000

Pseudo R2 0.285

Log likelihood -98.253


161

Table B1.2: Second-stage regression results. Dependent variables: probability of


qualified personnel”.

Core competencies

(Model 11)

Access to qualified personnel

(Model 12)


fail_cap -0.384 (0.332) 0.291 (0.376) -0.003 (0.331) 0.599 (0.381)

fail_out -0.305 (0.315) -0.751* (0.337) -0.323 (0.312) -0.712* (0.336)

host_rol 0.581 (0.398) 1.553** (0.472) -0.525 (0.395) 0.234 (0.458)

host_ipr_park -0.340 (0.748) -0.669 (0.761) -0.217 (0.727) -0.483 (0.738)

Control

captive_mode -0.149 (0.292) 0.569 (0.347) -0.252 (0.291) 0.364 (0.348)

cul_dis 0.005 (0.118) -0.089 (0.121) 0.159 (0.118) 0.097 (0.121)

host_res 0.193 (0.431) 0.019 (0.435) 0.226 (0.427) 0.078 (0.431)

emp_world 0.013 (0.042) 0.098* (0.047) -0.037 (0.041) 0.031 (0.047)

mills 1.266** (0.326) 1.074** (0.328)

China 0.059 (0.479) 0.298 (0.487) 0.583 (0.476) 0.798† (0.484)

India -0.353 (1.366) -1.744 (1.421) 1.544 (1.347) 0.470 (1.395)

Western developed countries -0.288 (0.989) -1.786† (1.070) 2.332* (0.973) 1.227 (1.033)

South East Asia 0.014 (1.285) -0.663 (1.305) 0.935 (1.268) 0.395 (1.287)

Far East developed countries -1.517 (1.090) -3.143** (1.177) 1.458 (1.067) 0.245 (1.133)

Latin America -0.059 (0.846) -1.453 (0.923) 1.072 (0.846) -0.045 (0.920)

financial/insurance/banking services -0.356 (0.405) -1.763** (0.546) 0.556 (0.410) -0.577 (0.537)

health/biotech/pharma/chemical -0.001 (0.484) 0.481 (0.503) -0.318 (0.483) -0.065 (0.501)

manufacturing -0.272 (0.332) -0.356 (0.336) -0.125 (0.324) -0.193 (0.327)

professional services 1.079† (0.570) 1.205* (0.572) 1.302* (0.589) 1.451* (0.597)



electronics

-0.403 (0.302) -0.144 (0.312) 0.388 (0.298) 0.645* (0.309)

high tech and technical services 0.037 (0.370) 0.487 (0.391) -0.185 (0.364) 0.174 (0.381)

cut 1 -2.555 (5.291) -3.710 (5.343) -0.568 (5.192) -1.359 (5.236)

cut 2 -1.658 (5.288) -2.731 (5.338) 0.603 (5.181) -0.157 (5.225)

cut 3 -0.628 (5.287) -1.638 (5.338) 1.478 (5.187) 0.760 (5.230)

cut 4 0.928 (5.290) -0.011 (5.339) 2.819 (5.189) 2.162 (5.231)

N 161 161 161 161

LR chi2 (32) 38.37 53.79 33.81 44.76

Prob > chi2 0.008 0.000 0.027 0.002

Pseudo R2 0.089 0.124 0.079 0.104

Log likelihood -197.349 -189.637 -198.114 -192.641


162

Table B1.3:Second-stage regression results. Dependent variables: probability of

achieving the outcomes of “improved organisational flexibility.

Organizational flexibility

(Model 13)

Firm's overall competitiveness

(Model 14)


fail_cap 0.517 (0.343) 1.063** (0.390) 0.159 (0.332) 0.253 (0.375)

fail_out -0.168 (0.315) -0.502 (0.335) -0.496 (0.327) -0.550 (0.342)

host_rol -0.068 (0.401) 0.665 (0.471) -0.456 (0.406) -0.323 (0.474)

host_ipr_park -1.407† (0.747) -1.716* (0.765) -0.658 (0.746) -0.703 (0.751)

Control

captive_mode -0.370 (0.293) 0.177 (0.346) 0.441 (0.304) 0.535 (0.350)

cul_dis 0.053 (0.121) -0.014 (0.125) -0.105 (0.120) -0.120 (0.123)

host_res 0.370 (0.453) 0.278 (0.465) 0.271 (0.436) 0.244 (0.428)

emp_world -0.064 (0.041) -0.000 (0.047) 0.038 (0.042) 0.050 (0.048)

mills 0.982** (0.328) 0.173 (0.320)

China 0.266 (0.507) 0.511 (0.526) 0.135 (0.476) 0.171 (0.480)

India 0.441 (1.413) -0.473 (1.471) 0.319 (1.380) 0.122 (1.427)

Western developed countries 0.722 (0.970) -0.387 (1.040) 1.211 (0.991) 1.002 (1.064)

South East Asia 1.048 (1.399) 0.728 (1.455) 0.266 (1.281) 0.171 (1.293)

Far East developed countries 0.176 (1.096) -1.004 (1.174) 0.286 (1.069) 0.074 (1.139)

Latin America 0.282 (0.874) -0.680 (0.944) 0.863 (0.875) 0.669 (0.944)

financial/insurance/banking services 0.600 (0.408) -0.441 (0.537) -1.136** (0.411) 1.327* (0.541)

health/biotech/pharma/chemical 0.261 (0.482) 0.649 (0.503) -2.031*** (0.537) -1.987*** (0.544)

manufacturing 1.080** (0.339) 1.086** (0.342) -0.851* (0.341) -0.860 (0.342)

professional services 0.978† (0.556) 1.086† (0.561) 0.517 (0.567) 0.532 (0.567)



electronics

0.217 (0.300) 0.459 (0.314) -0.470 (0.312) -0.427 (0.321)

high tech and technical services -0.375 (0.368) -0.022 (0.388) -0.870* (0.380) -0.803* (0.399)

cut 1 -5.747 (5.304) -6.425 (5.355) -3.249 (5.334) -3.420 (5.343)

cut 2 -4.432 (5.281) -5.068 (5.329) -2.245 (5.327) -2.402 (5.334)

cut 3 -3.383 (5.279) -3.993 (5.327) -1.446 (5.328) -1.598 (5.334)

cut 4 -2.005 (5.276) -2.558 (5.322) -0.106 (5.330) -0.262 (5.336)

N 161 161 160 160

LR chi2 (32) 50.53 59.64 44.48 44.78

Prob > chi2 0.000 0.000 0.001 0.002

Pseudo R2 0.119 0.140 0.100 0.101

Log likelihood -187.626 -183.069 -200.524 -200.378


163



quality”.


(Model 15)


(Model 16)


fail_cap -0.720* (0.329) -0.227 (0.370) -0.580† (0.330) -0.413 (0.370)

fail_out 0.067 (0.311) -0.252 (0.330) 0.003 (0.312) -0.103 (0.330)

host_rol 0.220 (0.395) 0.900* (0.466) -0.794* (0.396) -0.571 (0.456)

host_ipr_park -0.497 (0.727) -0.711 (0.734) -0.387 (0.716) -0.450 (0.719)

Control

captive_mode -0.338 (0.288) 0.194 (0.341) -0.369 (0.289) -0.193 (0.339)

cul_dis -0.108 (0.115) -0.179 (0.118) -0.145 (0.116) -0.167 (0.118)

host_res 0.038 (0.423) -0.082 (0.425) 0.797† (0.423) 0.759† (0.425)

emp_world -0.021 (0.040) 0.041 (0.045) 0.023 (0.041) 0.043 (0.045)

mills 0.931** (0.315) 0.305 (0.308)

China 0.666 (0.475) 0.878† (0.483) 0.571 (0.471) 0.632 (0.476)

India -0.130 (1.339) -1.072 (1.379) 2.221† (1.329) 1.915 (1.364)

Western developed countries 0.261 (0.965) -0.787 (1.032) 1.633† (0.969) 1.277 (1.033)

South East Asia -0.108 (1.255) -0.553 (1.267) 2.381† (1.252) 2.236† (1.261)

Far East developed countries -0.187 (1.059) -1.289 (1.126) 1.633 (1.064) 1.264 (1.127)

Latin America 0.217 (0.833) -0.754 (0.898) 1.479† (0.841) 1.161 (0.900)

financial/insurance/banking services 0.183 (0.398) -0.803 (0.520) 0.243 (0.399) -0.084 (0.518)

health/biotech/pharma/chemical -0.402 (0.483) -0.067 (0.499) -0.214 (0.476) -0.104 (0.489)

manufacturing 0.029 (0.325) -0.009 (0.327) 0.652* (0.328) 0.637† (0.328)

professional services 0.816 (0.555) 0.929† (0.557) -2.048*** (0.586) 2.078*** (0.586)



electronics

0.391 (0.299) 0.633* (0.312) -0.034 (0.295) 0.034 (0.303)

high tech and technical services 0.366 (0.366) 0.714† (0.386) 0.370 (0.362) 0.482 (0.379)

cut 1 -3.815 (5.176) -4.408 (5.197) 2.666 (5.089) 2.518 (5.092)

cut 2 -3.117 (5.176) -3.659 (5.197) 3.994 (5.083) 3.851 (5.087)

cut 3 -2.129 (5.176) -2.635 (5.196) 5.128 (5.091) 4.994 (5.094)

cut 4 -1.056 (5.175) -1.511 (5.194) 6.028 (5.097) 5.893 (5.101)

N 161 161 161 161

LR chi2 (32) 28.10 36.91 43.11 44.09

Prob > chi2 0.107 0.017 0.002 0.002

Pseudo R2 0.061 0.080 0.094 0.096

Log likelihood -217.445 -213.041 -208.701 -208.211


164



improvement(s)”.


(Model 17)

Breakthrough process

improvement(s)

(Model 18)


fail_cap 0.311 (0.331) 0.133 (0.374) -0.099 (0.330) 0.282 (0.375)

fail_out -0.492 (0.314) -0.384 (0.332) 0.059 (0.319) -0.176 (0.337)

host_rol 0.029 (0.401) -0.216 (0.468) -0.195 (0.401) 0.310 (0.464)

host_ipr_park -2.304** (0.751) -2.243** (0.755) -1.370† (0.738) -1.547* (0.745)

Control

captive_mode 0.553† (0.294) 0.373 (0.343) -0.086 (0.295) 0.313 (0.349)

cul_dis -0.036 (0.119) -0.016 (0.121) -0.098 (0.117) -0.151 (0.120)

host_res -0.417 (0.425) -0.364 (0.428) 0.309 (0.422) 0.226 (0.425)

emp_world -0.019 (0.042) -0.041 (0.047) 0.020 (0.042) 0.067 (0.047)

mills -0.329 (0.322) 0.685* (0.315)

China 0.806† (0.485) 0.757 (0.488) 0.663 (0.487) 0.803 (0.491)

India -0.811 (1.343) -0.450 (1.390) 0.465 (1.345) -0.245 (1.387)

Western developed countries 3.174** (1.042) 3.568** (1.112) 1.596 (1.027) 0.796 (1.088)

South East Asia 0.051 (1.259) 0.248 (1.275) 1.195 (1.268) 0.871 (1.280)

Far East developed countries 2.968** (1.126) 3.371** (1.194) 0.481 (1.093) -0.369 (1.159)

Latin America 0.717 (0.852) 1.075 (0.922) 1.190 (0.854) 0.479 (0.915)

financial/insurance/banking services -0.504 (0.418) -0.142 (0.549) -0.280 (0.410) -1.031† (0.535)

health/biotech/pharma/chemical -0.997† (0.518) -1.092* (0.523) -0.766 (0.513) -0.570 (0.528)

manufacturing 0.809* (0.331) 0.834* (0.333) 0.266 (0.328) 0.225 (0.329)

professional services 0.682 (0.555) 0.663 (0.555) 1.479** (0.569) 1.552** (0.571)



electronics

-0.096 (0.296) -0.167 (0.305) -0.399 (0.299) -0.256 (0.306)

high tech and technical services 0.001 (0.366) -0.109 (0.381) 0.225 (0.365) 0.463 (0.382)

cut 1 -12.096 (5.209) -11.888 (5.223) -3.824 (5.126) -4.289 (5.142)

cut 2 -11.420 (5.202) -11.204 (5.215) -3.066 (5.122) -3.519 (5.137)

cut 3 -10.591 (5.194) -10.373 (5.208) -2.001 (5.126) -2.427 (5.141)

cut 4 -9.877 (5.192) -9.665 (5.205) -0.212 (5.113) -0.602 (5.124)

N 161 161 161 161

LR chi2 (32) 65.04 66.09 45.75 50.50

Prob > chi2 0.000 0.000 0.001 0.000

Pseudo R2 0.129 0.131 0.101 0.111

Log likelihood -218.906 -218.383 -203.713 -201.337


165

Chapter 5: Why do multinational firms locate R&D to China?

An analysis of the determinants of location strategies

Abstract

In this paper, we use patent data to examine the proportion of four strategies that

multinationals have adopted to offshore R&D activities to China, i.e., Technology

Building (TB), Market Seeking (MS), Technology Augmenting (TA), and Technology

Exploiting (TE) in the pharmaceutical industry and in the computer and electronics

industry. Our results show that TB and TA were the two most important location

strategies adopted by firms before 2000, but since then the importance of MS and TE

has been gradually increasing, especially for firms in computer and electronics industry.

In particular, the regression results suggest that IPR protection strength in China is

positively associated to MS and TE, but negatively associated to TB and TA. This

indicates that when the IPR protection in China is stronger, firms are more willing to

locate technologies that China is not specialised in there. We also find support for the

role that institutional factors (i.e., institutional distance, IPR protection of firm’s home

country, and the rule of law in host country) play on the choice of location strategies

MNCs adopted in China. These findings are somewhat in contrast to previous studies

which indicate that TE is the leading motive for FDI of R&D in China since China is a

manufacturing base with a large internal market and weak IPR protection.

5.1 Introduction

The Chinese government adopted an “open-door” policy in 1978 to attract Foreign

direct investments (FDI). Since then, an increasing number of Multinational

Corporations (MNCs) have located labour-intensive manufacturing activities to China,

initially very standardised activities, they are gradually becoming increasingly advanced

in nature (Manning, et al., 2008). China is emerging as a research and development

(R&D) hub, possibly because of the government push to promote science and

innovation and a race by Chinese companies to catch up with Western competitors

(Fingar, 2015). According to a report in the Financial Times, between January 2010 and

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December 2014, China attracted 88 greenfield R&D projects from foreign firms, which

involved a remarkable 5.5 billion USD capital investment (Fingar, 2015).

Previous studies have identified that the two main motives that drive MNCs to

internationalise their R&D activities are exploiting a firm’s technology advantages that

are developed at home, and augmenting a firm’s existing technology advantages by

utilising new knowledge resources in a firm’s overseas R&D sites (Kuemmerle, 1999).

With regard to China as host country of R&D activities, scholars argue that the former

motive is the one that MNCs initially pursued before early 2000s, and the importance of

the latter one is gradually increasing due to the growing domestic market size, potential,

and increasing subsidiary capabilities (Bruche, 2009; Motohashi, 2012). However, the

empirical basis for this is scarce and needs further analysis.

In this paper we are interested in the motives, strategies and factors affecting R&D

activities of MNCs in China. We first present an overview of MNCs’ strategies for

conducting innovation activities in China through their subsidiaries, and how the

strategies have evolved over time. Second, we identify what factors affect the different

strategies (i.e., efficiency seeking strategies, including market seeking and technology

exploiting; technology exploring strategies, including technology building and

technology augmenting) for foreign MNCs to conduct innovation activities in China,

with a focus on institutional factors (i.e. the IPR protection strength of firm’s home

country and China, the quality of rule of law in China, and the institutional distance

between firm’s home country and China).

We select the 79 top performing multinational firms by sales revenue that have

established wholly owned labs in China from two knowledge intensive industries ─

pharmaceutical industry and computer and electronics industry. By analysing the patent

data, we conclude that locating R&D activities to China are motivated not only by

efficiency seeking, but also by exploring the technology areas where China has an

advantage. We also find that institutional factors affect MNC’s motives for offshoring

R&D activities to China. Our findings contribute to existing literature and enhance our

understanding of modern innovation offshoring and multinationals’ R&D activities in

China.

This paper is organised by starting with a literature review on location strategies

(motives) and developing the conceptual framework of this research in section 5.2. In

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section 5.3, we explain the procedure of sampling selection and present the data. In

sections 5.4 and 5.5, we report the descriptive data analysis results and regression

results. Section 6 concludes the paper and discusses the potential implications.

5.2 Developing a conceptual framework for MNCs location strategies

In this section, we start with reviewing previous studies regarding MNCs location

strategies, then building on relevant theories and frameworks, namely, the resource

based view (RBV) and institutional theory, we develop the conceptual framework of

this paper, and we identify the research gaps from which we derive the research

questions of this paper.

5.2.1 Location strategies

In this section, we review location strategies that MNCs have adopted when offshoring

R&D activities to different countries. Kuemmerle (1999) identified two main motives

that drive MNCs to offshore R&D activities: home-base-exploiting (HBE) and home-

base-augmenting (HBA). The former refers to exploiting advantages which are

developed at the firm’s home base, which include adapting products, services, and

production processes to meet the needs in overseas markets (Ernst, 2006; Kuemmerle,

1999). The latter means that the firm establish R&D sites overseas with the aim to

augment firm’s existing knowledge by transferring the new knowledge existing in its

overseas R&D sites back to its home base and integrate this knowledge for developing

new products or services (Ernst, 2006; Kuemmerle, 1999). In the international business

literature, HBE is also known as competence-creating subsidiary mandate, and HBA is

known as competence-exploiting subsidiary mandate or market-servicing investment

(Cantwell & Mudambi, 2005). Researchers have argued that the purposes for MNCs to

locate R&D abroad has evolved from adapting products to the local needs (HBE) to

gradually generating new technologies by utilising the resources and advantages in

some host countries (HBA) (Pearce, 1999; Kuemmerle, 1999; Cantwell & Piscitello,

2005).

Previous studies have stated that the R&D sites offshored to developed economies are

more likely to be driven by HBA because of the sufficient science and technology

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resources that exist in those countries, but R&D activities offshored to developing

economies are more focused on product commercialisation and adaption (HBE) (Liu &

Chen, 2012). Kuemmerle (1999) argued that R&D in host countries that have a relative

attractive market will be more likely to be HBE driven, while R&D in host countries

that have a strong knowledge base and big pool of talent will be likely to be HBA.

However, it has been observed that this phenomenon is changing, since some

developing host countries now possess specific resources which can be used to

supplement the resources in firm’s home base, such as a great pool of qualified but

relative cheap talent available in China (Liu & Chen, 2012; Picci, 2010). In particular,

researchers found that the R&D activities conducted in China initially focused on HBE,

but gradually include HBA and HBE simultaneously (Bruche, 2009; Ernst, 2006).

The revealed technology advantage (RTA) index provides an indication of a firm’s

relative specialisation in terms of patents in selected technological domains (Patel &

Vega, 1999), e.g., an RTA index higher than one in a technology field in a firm’s

home/host country indicates that the firm has comparative advantage in that technology

field in its home/host country. An RTA index lower than one in a technology field in

firm’s home/host country indicates that the firm is comparatively weak in that

technology field in its home/host country. By comparing RTA index of a firm’s home

country and host country, using patent data granted by the United States Patent and

Trademark Office (USPTO) of 220 firms from 1990 to 1996, Patel and Vega (1999)

further categorised the drivers of MNCs to establish R&D overseas into 4 different

types of location strategies in R&D: Technology Seeking (TS), Market Seeking (MS),

HBA, and HBE. Patel and Vega (1999) found that HBA and HBE are the two main

motives that drive MNCs to establish R&D centres overseas, and limited evidence

suggesting that firms offshore R&D activities for the purpose of compensating the

technologies that are weak at home. They also found that firms in the electronics

industry show a higher share of cases that are driven by HBE, while pharmaceutical

firms present a higher share of cases that are driven by HBA (Patel & Vega, 1999). This

result is confirmed by Le Bas and Sierra (2002), who found that the location strategies

HBA and HBE represent the majority of cases. However, their findings also suggest that

HBA outperform HBE, and TS plays a slightly more important role than in Patel and

Vega’s study.

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Laurens et al. (2015) used patent data from 2003 to 2005, and the findings are consistent

with previous studies, but also noted that the importance of HBA slightly decreased

while it increased for HBE. However, since MS and HBE indicate that the technology a

firm offshored is comparatively weak in its host country, while TS and HBA indicate

that the technology a firm offshored is comparative strong in its host country, it is

difficult to identify more fundamental differences between MS and HBE from the labels

of the location strategies, which is the same for TS and HBE location strategies.

Therefore, in order to better capture key differences between these four location

strategies, we change the name of TS, MS, HBA and HBE strategies to Technology

Building (TB), Market seeking (MS), Technology Augmenting (TA), and Technology

Exploiting (TE), respectively, on the basis of the relationship between RTA in home

and host country, as illustrated in Figure 5.1.

Figure 5.1: 4 types of location strategies of FDI in R&D.

5.2.2 The role of resources and institutions in locations strategies: a conceptual

framework

The RBV holds that firms’ resources can help them achieve sustained competitive

advantages if they have four attributes: valuable, rare, imperfectly imitable and

nonsubstitutable (Barney, 1991). Resources play an important role in strategic

Host country

Home country

Market Seeking (MS)This strategy indicates that the motivation behind such choices are not technology-oriented. As Le Bas and Sierra (2002) suggest, such FDI in R&D are mainly for the purpose of international expansion, via the mergers and acquisition (M&A) activities to gain access to the market.

Technology Building (TB)Aims to counteract home country weaknesses in a given technological field by offshoring R&D activities in such technology field to a host country with proven strength in that fields.

Technology exploiting (TE)Patel and Vega (1999) suggest, this strategy is very close to adaption/technical support function. Le Bas and Sierra (2002) labelled this strategy as “efficiency-oriented FDI in R&D”.

Technology augmenting (TA)This strategy can be adopted by a firm to strengthen its competitive advantage by closely monitoring the very sophisticated technology and improving its technological learning capability.

Home RTA>1Home RTA<1

Host RTA>1

Host RTA<1

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management (Wu, 2010), as well as on the decisions of the firms’ boundaries (Teece, et

al., 1997). Obtaining access to resources that are not available in the home country is

one of the key driving forces for MNCs to locate R&D abroad (Manning, et al., 2008;

Schmeisser, 2013; Stringfellow, et al., 2008). Companies have faced increasing

difficulty of recruiting S&E talent with advanced degrees in the last two decades, and

have been searching for highly skilled S&E talent to support domestic innovation

activities (Farrell, 2005; Manning, et al., 2008; Lewin, et al., 2009; Demirbag &

Glaister, 2010). Countries with more specialised knowledge could provide firms with

location-specific advantages, and firms locating in these countries can obtain better

innovation inputs, greater flexibility, and thus enhanced innovation capabilities (Nieto

& Rodríguez, 2011). Offshoring can also increase diversity and heterogeneity in the

knowledge bases by gaining knowledge from multiple markets where MNCs are

operating (Nieto & Rodríguez, 2011; Gerybadze & Reger, 1999) and help MNCs to

improve their abilities to combine knowledge for innovation (D’Agostino, et al., 2013).

With regard to the four different location strategies, TB and TA refer to technologies in

which host countries are specialised (Patel & Vega, 1999), and accessing technological

resources in host countries is one of the main motives for MNCs to adopt such

strategies. Therefore, RBV is relevant to analyse these two location strategies.

Since resources are context based, their value depends on the characteristics of a given

environment (Teece, et al., 1997). More concretely, if MNCs intend to expand abroad

successfully, they need to balance the benefits of exploitation of resource-based

advantage with the costs of not being isomorphic with the institutional environment of

the host market (Brouthers, et al., 2008). Therefore, when analysing MNCs decisions

regarding locating R&D in China, institutional theory should also be adopted in addition

to RBV to provide a more comprehensive framework.

Firms offshoring innovation need to protect proprietary knowledge and technology

transferred across national borders, and face a complex variety of legal rules and

procedures (Oxley, 1999). Therefore, from the institutional theory perspective, the legal

system and its enforcement in a host country, which include rule of law and IPR

protection (Nassimbeni, et al., 2012), are important factors that firms need to consider

when they are making offshoring decisions (Javalgi, et al., 2009). Weak intellectual

protection regimes in many emerging economies may constitute a major concern, and

serve as a deterrent for offshoring innovation work (Bardhan & Jaffee, 2005), since

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firms will face the risk that competitors may steal their intellectual property and

proprietary processes (Aron & Singh, 2005). Researchers have stated that firms’

decisions to offshore R&D services are also conditioned by firms’ home country IPR

system (Lewin & Volberda, 2011), and that weak IPR protection in home countries can

prevent firms from outsourcing in their domestic market (Martínez-Noya & García-

Canal, 2011). In addition, Flores and Aguilera (2007) found that MNCs prefer to locate

facilities to countries with similar institutional environment to their home countries, in

terms of legal, political and cultural dimensions. Therefore, the institutional distance

between a firm’s home country and the host country may affect decisions to offshore

R&D.

Historically, the weak intellectual property protection in China has been a serious

concern among foreign companies (Huang & Khanna, 2003). Studies have suggested

that firms offshore R&D activities with lower technological value-added or the lower-

end R&D value chain to countries with weak IPR protection such as China (Grimes &

Miozzo, 2015; Bruche, 2009; Zhao, 2006), and argue that strategically important R&D

activities will not be offshored or special methods will be adopted if MNCs offshore

innovation activities to China (Quan & Chesbrough, 2010; Zhao, 2006). However,

China amended its patent law in 2000 and its copyright and trademark laws in 2001 to

ensure that its IP system complied with the standards of the TRIPS Agreement, enabling

the country to join the WTO. China further amended the patent law for a third time in

2008 (Yu, 2018). It is claimed that the IPR regime in China is now improving

(Awokuse & Yin, 2010), but whether the improvement of the IPR protection in China

will strengthen firms’ commitment regarding offshoring valuable innovation activities is

still unknown.

The main purpose of MS strategy is to expand internationally to gain access to new

markets (Le Bas & Sierra, 2002), and this is affected by the regulations and policies

issued by host countries (Hoekman & Nicita, 2011). TE strategy refers to technologies

which a firm’s home country is strong, but the host country is not (Patel & Vega, 1999).

It can be proposed that this strategy may lead to higher risk of IP leakage, and the

choice of such strategy should be sensitive to the strength of IPR protection in the host

country. Therefore, institutional theory is expected to directly affect the choice of these

two strategies. RBV should also be considered since MS and TE strategies also involve

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requiring specific resources available at host country. Based on the discussion above,

we draw the conceptual framework of this paper as shown in Figure 5.2.

Figure 5.2: Resources, institutions and location strategies.

Note: →: indicates that the relationship is stronger; ---→: indicates that the relationship

is weaker.

In summary, the present research tries to fill the gaps in the literature on the following

aspects: first, previous research regarding location strategies only focused on specific

short periods, here we intend to provide a fresh and updated analysis of the evolution of

MNCs location strategies. Second, much research have studied FDIs for R&D, but most

studies have only focused on a few separate, selected influencing factors. Even though

the importance of institutional factors on offshoring decisions has been recognised by

scholars (Gonzalez, et al., 2006; Rebernik & Bradac, 2006; Dunning, 1988; Dunning,

1980; Gammeltoft, 2006; Kinkel, et al., 2007), very few studies have comprehensively

researched the effect of legal system factors on offshoring decisions. In this paper, we

focus on the formal regulatory dimension, and test the role of these institutional factors

on the choice of four different location strategies MNCs adopted in China. Specifically,

the research questions of this paper are the following:

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1. What are the R&D location strategies of MNCs in China? How have such

choices evolved?

2. What factors affect the choice of different location strategies by MNCs in

China?

5.3 Sampling and data

In this paper, the empirical analysis is focused on two R&D intensive industries:

computer and electronics industry and pharmaceutical industry. According to a report

published by PwC (2014), these two industries are the top industry R&D spenders, and

they are also the industries with the highest R&D intensity. Among the top 300

organisations ranked by number of patents granted by USPTO in 2014, firms from the

computer and electronics industry are playing a leading role (IPO, 2015). With regard to

the pharmaceutical industry, considering that the development phase of a new drug

typically exceeds 10 years, more than half of the patent life of it could be lost before the

product is even launched. To further emphasise the importance of patent protection, it is

known that once the product no longer protected, it is possible for the original developer

to lose up to 90% of their market share to generic manufacturers within 12 months

(Plumb, 2005). Since computer and electronics and pharmaceutical industries are

knowledge intensive (according to the R&D spending ratio), the strength of IPR

protection plays an important role for both industries (computer and electronics firms

files a large number of patents, while infringements can cause big financial loss for

pharmaceutical firms), these two industries suit our research perfectly.

To build the samples, we started by ranking the world’s top 500 public firms in the

pharmaceutical and computer and electronics industries based on their sales revenue in

2014 reported in the Thomson one database. Companies from the Greater China region

were eliminated from the sampling. The rationale behind this decision was that

activities of firms from Mainland China are incompatible with the overall research aim

of this study, which is to analyse MNC’s innovation activities in China. Corporations

from Hong Kong and Taiwan were not considered suitable due to the fact that potential

language and cultural barriers for them are likely less severe compared to companies

from other countries. Furthermore, Chinese government policies aimed toward these

companies vary in comparison with those targeting at companies from outside the

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Greater China region, making industry-wide comparisons including these companies

misleading. After reviewing the top 500 firms from each industry, based on their sales

revenue and origin, 322 firms in the electronics industry and 317 firms in the

pharmaceutical industry were identified.

As the main focus of this research is to analyse firms which have offshored innovation

activities to China, firms which do not operate in China were carefully considered

whether to be included in the sample. This was done in a two-step approach. First we

filtered out all firms for which we found no indication of any foreign direct investment

or business activities in China (including direct sales, manufacturing, and R&D), based

on an analysis of each company’s official website (by identifying whether they have

contact information in China or if they have Chinese language option on website, and

using “China” as keyword to search in their website), and their latest 3 years annual

report (by checking whether “China” is mentioned anywhere in their annual report).

Second, we identified R&D activities in China through the existence of an R&D centre

in the country. To do so, we reviewed each company’s official website and their latest 3

years annual report as well as information from the FACTIVA database to identify if

and when the firm established an R&D centre in China. As a result, our sample of

companies with a clearly identifiable R&D centre in China consists of 33

pharmaceutical firms and 98 computer and electronics firm. Out of those, we have data

for the year of establishment of the R&D centre in China for 21 firms in the

pharmaceuticals sector and 63 firms in the computer and electronics sector, and these

firms constitute our database.

Economists have suggested that patents are regarded as a good indicator of innovation

activities (Griliches, 1990; Griliches, et al., 1987; Nagaoka, et al., 2010). By using

firm’s patent information, we can access what innovation activities are conducted where

by whom (Kang, 2015). It is widely acknowledged that using patent information to

analyse innovation activities has several advantages: First, patent documents contain

rich information, which covers information on inventors and assignee, the description of

the invention, citations, the timing of the invention, the technological classification and

coverage of protection (Braun, et al., 2011; Hall, et al., 2001). Second, patent data can

be easily accessed via different patent databases (Nelson, 2009), e.g., USPTO, National

Bureau of Economic Research (NBER), The Lens, etc. Third, patent data are

consistently reported, and often available in long historical time series (Hall, et al.,

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2001). Finally, patent data is a comparatively cheap source to learn firm’s innovation

activities (Sharma, et al., 2016).

While patent data to analyse firm’s innovation activities are widely used, the limitations

regarding patent data should still be kept in mind. First, patenting is not the only way to

protect inventions, some firms may choose a secrecy strategy or other ways of

appropriability instead (Hall, et al., 2001; Braun, et al., 2011; Basberg, 1987). Second,

not all innovations are patentable since patenting requires meeting the patentability

criteria according to patent law (Hall, et al., 2001). Therefore, researchers should avoid

inaccurate conclusions regarding the nature of firm’s R&D activities if using patent

data. Third, the propensity to patent might vary, other things being equal, from country

to country, over time or across sectors (Bronzini & Piselli, 2016). Instead of using

patent data from one application authority, researchers should extract the patent data

from multi-country databases or countries which would attract a high number of

applicants, e.g., USPTO, European Patent Office (EPO), worldwide Patent Statistical

Database (PATSTAT).

We use PATSTAT which contains bibliographical data relating to more than 100

million patent documents from 90 patent authorities (PATSTAT, 2017). By using the

company name (also including subsidiary name(s) according to each company’s official

website) as the key word to search in the PATSTAT database (2017 spring edition), the

patent filing information of the selected firms are identified. There are some firms

which do not have available patent information from the database, and these are

eliminated from the sample. Since the patent reviewing process takes on average 2 years

from the time of application, in order to reduce truncation bias, previous studies have

suggested excluding patent filed at least 3 years prior to the end date of the patent

database (Dass, et al., 2017; Hall, et al., 2001). In addition, applicants have up to 30

months to file patent applications worldwide after the first patent filing according to the

Patent Cooperation Treaty (PCT) (Lanjouw & Schankerman, 2004). Therefore, we have

only included patents which were applied for before the end of 2014, this is also

consistent with the company search on Thomson one database (2014). The firm level

financial data is extracted from Datastream and Compustat by using the firm ID. Firm’s

patent information is then matched with firm’s financial data. There are data of 21

pharmaceutical firms and 58 computer and electronics firms from 1990 to 2014 which

are kept in the final sample.

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Detailed information of the sample is shown in Table 5.1, 36% of the computer and

electronics firms established R&D centres during 1997 to 2002, while approximately

50% of the firms established R&D centres in China during the interval of 2003 to 2008,

which indicates that about half of our sample firms in the pharmaceutical industry

established R&D centres in China during 2003-2008. In addition, over 80% of the

pharmaceutical firms in the sample are from the United States (38.1%) and Europe

(42.86%), while the major share of computer and electronics firms in the sample

originate from the United States (43.10%) and Japan & South Korea (32.76%). It is

noted that 58 firms (out of 76) have patents with Chinese inventor participation before

the R&D centre was established. However, this only constitutes a small proportion of

patents. Of the 19,873 patents, 7.8% were filed before the official R&D centre was

established, which only constitutes a small part of the total patents with Chinese

inventors. This may indicate that most firms had some minor innovation activities

conducted in China before they chose to increase its investment.

Table 5.1: An overview of the sample. Industry Year of first R&D

operation

Year of first business

activities in China

Origin

Pharma Before 1990 0 Before1990 8 (38.10%) Europe 9 (42.86%)

1990-1996 2 (9.09%) 1990-1996 10 (47.62%) Japan &

Korea

4 (19.05%)

1997-2002 4 (18.18%) 1997-2002 1 (4.76%) United

States

8 (38.10%)

2003-2008 10 (45.45%) 2003-2008 1 (4.76%)

2009-2014 5 (22.73%) 2009-2014 1 (4.76%)

Total 21 21 21

Electronics Before 1990 1 (1.72%) Before1990 18 (31.03%) Europe 11 (18.97%)

1990-1996 2 (3.45%) 1990-1996 16 (27.59%) Japan &

Korea

19 (32.76%)

1997-2002 21 (36.21%) 1997-2002 18 (31.03%) North

America

28 (48.28%)

2003-2008 28 (48.28%) 2003-2008 6 (10.34%)

2009-2014 6 (10.34%) 2009-2014 0

Total 58 58 58

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5.4 The evolution of the choices of different location strategies MNCs have

adopted in China

To identify motives for establishing R&D activities in China, we apply the framework

of the four different location strategies introduced above. In this section, we identified

the proportion of these four different location strategies that MNCs have adopted in

China, and how they have evolved. The patents in the PATSTAT database are classified

into 35 technology fields grouped by 5 technology sectors according to the International

Patent Classification (IPC) code. Following the research methods adopted by Patel and

Vega (1999) and Le Bas and Sierra (2002), firm’s homeRTAij90, the RTA of China

(hostRTAij(C)91) and the RTA of other host countries (hostRTAij(other)92) have been

calculated separately. As shown in the formula (1) below, Pij indicates the number of

patents granted to firm i in technological field j. A value of RTA above 1 indicates a

relative specialisation in that technology field, while a value less than 1 indicates

relative weakness in that technology field (Patel & Vega, 1999).

𝑅𝑇𝐴𝑖𝑗 =(𝑃𝑖𝑗 ∑ 𝑃𝑖𝑗𝑖⁄ )

∑ 𝑃𝑖𝑗𝑗 ∑ 𝑃𝑖𝑗𝑖𝑗⁄ (1)

Therefore, by comparing the RTA value of a firm’s home and host countries, the

strengths and weaknesses in varied technology fields of firm’s home country and host

country can be identified. In addition, by comparing the RTA of China with the RTA of

other host countries, we can identify the specific technological attraction of China as

host. The number of cases of each location strategy below represents the total number of

that location strategy in all technology fields of the sample firms (number of technology

fields × number of firms).

90 homeRTAij: by using firm’s home country’s (inventors from firm’s home country) share of all patents

in that technology field, divided by its share of all patents in all fields. When homeRTAij >1, it indicates

that firm i is relatively specialised in technology field j in its home country. On the other hand, if the

RTAij <1, it indicates that firm i is relatively weaker in technology field j in its home country. 91 hostRTAij(C): by using firm’s host country ‒ China’s (inventors from China) share of all patents in that

technology field, divided by its share of all patents in all fields. When hostRTAij(C) >1, it indicates that

firm i is relatively specialised in technology field j in its host country ‒ China. on the other hand, if the

hostRTAij(C) <1, it indicates that firm i is relatively de-specialised in technology field j in China. 92 hostRTAij(other): by using firm’s all other host country’s (inventors from all the other countries except

China and firm’s home country) share of all patents in that technology field, divided by its share of all

patents in all fields. When hostRTAij(other) >1, it indicates that firm i is relatively specialised in

technology field j in all other host countries. On the other hand, if the hostRTAij(other) <1, it indicates

that firm i is relatively de-specialised in technology field j in all other host countries.

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For the analysis in this section, we used the number of patents (by counting the distinct

DOCDB family ID93) of inventors from firm’s home/host country in each technology

field divided by the total number of patents of the firm in each technology field for the

numerator, and use the sum of the number of patents (by counting the distinct DOCDB

family id) of inventors from firm’s home/host country in each technology field divided

by the sum of the number of patents of the firm in each technology field for the

denominator (as shown in formula 1).

Using patent data of selected firms from 1990 to 2014 and comparing the RTA value of

a firm’s home and host countries as done in previous studies (Le Bas & Sierra, 2002;

Patel & Vega, 1999; Laurens, et al., 2015), we have analysed the location strategies

behind a firm’s choices regarding offshoring innovation activities to China (the sum of

the share of four location strategies is 100%) and we have done this for four sub

periods: 1990-96, 1997-02, 2003-08, 2009-14. The rationale behind this decision is that

first, between 1990 and 1996, the share of patents with inventors from China remains at

a very low level, but started to increase from 1997 (Figure 5.3). Second, China has been

a member of WTO since 11th December 2001, and radically revised its IP laws to

comply with the minimum standards of the Agreement on Trade-Related Aspects of

Intellectual Property Rights (TRIPS) around 2000 (Li & Yu, 2015; Keupp, et al., 2009).

Chinese IP laws are further enhanced after 2008, which were arguably motivated by the

need to improve China’s innovation ability and transformation of the economy (Wu,

2009). Therefore, considering two intervals of 1997-2002 and 2003-2008 can provide

some evidence on whether joining the WTO and revising IP law affected firm’s choices

of offshoring innovation activities to China. We note that the share of patents and the

share of valuable patents (evaluated by the patent family size and number of citations)

with inventors in China increased from 2000 (Figures 5.3, 5.4 and 5.5). Third, referring

to the intervals of 2003-2008 and 2009-2014 can also help to identify whether the

financial crisis and the revision of patent law in 2008 have influenced firm’s choices of

offshoring innovation activities in China. It can be noted that the share of patents with

inventors from China peaked in 2008 and slightly fluctuated since then for computer

and electronics firms, while the share of valuable patents reached its peak in 2011 and

started decreasing after that (Figures 5.3, 5.4 and 5.5). However, the share of patents

93 DOCDB is “the EPO's master documentation database with worldwide coverage”, a single family ID

“is a collection of patent documents that are considered to cover a single invention” (EPO, 2017).

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and the share of valuable patents with inventors from China keep increasing for

pharmaceutical firms (Figures 5.3, 5.4 and 5.5).

Figure 5.3: The share of patents that include inventors in China based on patents filed

from 1990-2014 in both computer and electronics industry and pharmaceutical industry.

Figure 5.4: The share of family size of patents that include inventors in China based on


pharmaceutical industry.

0.00%

1.00%

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Inventors in China(pharmaceutical)

Inventors in China(electronics)

0.00%

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12.00%

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180

Figure 5.5: The share of citations of patents that include inventors in China based on


pharmaceutical industry.

From Figures 5.6 and 5.7, it can be noted that TB and TA strategies play leading roles

for both pharmaceutical firms and computer and electronics firms when conducting

R&D activities in China, which constitute over 80% of the cases during 1990 to 1996.

However, the share of companies which employ either of these two location strategies

gradually decrease in both industries.

The share of TB and TA as for firms in computer and electronics industry decreased in

both intervals of 1997-2002 and 2003-2008. The shares of TB and TA remain at a

similar level during 2009-2014 as during 2003-2008. It can also be noted that the share

of cases that involved MS and TE strategies are increasing while TB and TA are

decreasing. The share of TB and TA remains at approximately 50% during the period of

2003 to 2008 and 2009 to 2014. This may indicate that after China joined WTO, for

computer and electronics firms, about half of the cases are driven to offshore by seeking

China’s technology advantages, while the other half of the cases are driven by

increasing efficiency and gaining access to the Chinese market.

As for pharmaceutical firms, although the shares of TB and TA strategies are gradually

decreasing, they still appear to be more important strategies than TE and MS during the

whole time period, which is different from the situation of firms in computer and

electronics industry. The graph shows a clear increasing importance of efficiency

0.00%

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19

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181

seeking strategies, although technology resources seeking still plays a more dominant

role for pharmaceutical firms than for computer and electronics firms.


(host country: China).


firms (host country: China).

4.29%

17.12%

26.13%27.17%

48.57%

37.84%

27.16%

26.63%

35.71%

26.13%

22.84%

23.19%

11.43%

18.92%23.87% 23.01%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

9 0 - 9 6 9 7 - 0 2 0 3 - 0 8 0 9 - 1 4

TE

TA

TB

MS

43.48%

38.64%

29.13%31.88%

34.78% 36.36%

28.35% 30.43%

8.70%

15.91%25.20%

18.84%

13.04%

9.09%

17.32%18.84%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

9 0 - 9 6 9 7 - 0 2 0 3 - 0 8 0 9 - 1 4

TA

TB

MS

TE

182

Pharmaceutical firms that choose all the other locations other than China (Figure 5.8)

have a higher share of TE but lower share of TA compared with choosing China as the

offshoring destination for R&D. For electronics firms that choose to offshore R&D

activities to all the other locations other than China (Figure 5.9), TB and TE account for

the larger share of cases, especially TE strategy. Compared with firms choosing China

to be the R&D offshoring destination, TA is less important to firms that choose all the

other countries, although for both China and all other countries, the importance of MS is

gradually increasing, and it became more important for choosing China as the host

country after 2002. Further details can be found in Appendix C1. In addition, the share

of these four location strategies in five intervals (90-94, 95-99, 00-04, 05-09, 10-14) and

in each year94 (from 1990 to 2014) are also calculated, which are shown in Appendix C2

and Appendix C3, respectively. The results in these different intervals are consistent

with those discussed earlier on how the shares of these four location strategies have

evolved.


firms (host country: other).

94 Years with less than 30 cases are not shown in the graph.

32.33% 33.45%

30.09% 29.37%

13.36%

17.06%

20.69% 19.84%

26.29%20.14% 20.69% 20.63%

28.02%29.35%

28.53% 30.16%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

9 0 - 9 6 9 7 - 0 2 0 3 - 0 8 0 9 - 1 4

TB

MS

TA

TE

183


(host country: other).

In summary, seeking technology resources (TA and TB) are the main motives that drive

MNCs to offshore R&D activities to China for firms in both industries, and especially

for pharmaceutical firms. MS and TE only constitute a small proportion of all the

strategies that MNCs adopted during the early period of time, however, their importance

is gradually increasing, especially after 2002, when China joined WTO and

substantially improved its IPR protection. In the following section, we analyse the

factors affecting the choice of these four location strategies.

5.5 Influencing factors and location strategies

In this section, we test what institutional factors affect each of the strategies for locating

R&D to China.

5.5.1 Variables


As we investigate the factors affecting the choices of different location strategies, the

shares of TB (TB_r), MS (MS_r), TA (TA_r) and TE (TE_R) strategy are used as

dependent variables in separate analyses.

30.94%

34.84% 35.72% 35.58%

32.14%

32.64%26.31%

29.04%

19.96%17.90% 18.83% 19.43%

16.97%14.62%

19.14%15.96%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

9 0 - 9 6 9 7 - 0 2 0 3 - 0 8 0 9 - 1 4

TE

TB

TA

MS

184

5.5.1.2 Independent variables

IPR protection and quality of rule of law in host countries are important factors that

firms consider when they are making decisions of offshoring innovation activities

(Javalgi, et al., 2009; Nassimbeni, et al., 2012; Oxley, 1999), especially for firms that

adopted MS and TE strategies to manage their R&D activities. The United Stated Trade

Representative’s Special 301 report95 has been adopted to indicate the IPR protection

strength of China and firm’s home country (Zhao, 2006). The value of IPR protection

depends on whether the firm’s country of origin is on the Special 301 Watch list in a

certain year (the previous year as the patent filed). If China and firm’s home country are

on the priority foreign country list or under Section 306 Monitoring96, the IPR

protection strength will take value -3; if China and firm’s home country are on the

priority watch list, it will take value -2; if the country is on the watch list, it will take

value -1; otherwise, if a country does not appear in any watch list, the IPR protection

strength will take value 097. In addition to the IPR protection strength of China and

firm’s home country, we also used “rule of law” as defined by Kaufmann et al. (2003)

as a proxy for measuring the quality of rule of law in China.

Since firms tend to respond to external uncertainties resulting from institutional distance

by limiting their foreign commitment (e.g., Gooris & Peeters, 2014), we include an

institutional distance variable which represent the cumulative institutional difference

between host and home country of firms according to Kaufmann institutional indicators:

voice and accountability, political stability, government effectiveness, regulatory

quality, rule of law, and control of corruption (Manning, et al., 2018). According to the

discussion we provided in previous section, these institutional factors are adopted as

explanatory variables for testing the relationships between influencing factors and the

choices of MS and TE strategies. However, regarding the choices of TB and TA

strategies, these institutional factors are adopted as control variables.

95 Special 301 report “reflects the outcome of a Congressionally-mandated annual review of the global

state of intellectual property rights (IPR) protection and enforcement” (USTR, 2017). 96 “This means that USTR will be in a position to move directly to trade sanctions if there is slippage in

the country’s enforcement of bilateral IPR agreements” (USTR, 1997). 97 For example, if a firm is from Canada, in the 2006 special 301 report, China is on the priority watch list

and Canada is on the watch list, so the value of home_ip of this firm in 2007 is -1 and the value of host_ip

is -2.

185

Regarding influences of the characteristics that the patent may have to the choice of

varied location strategies, following Brav et al. (2017) and Lin et al. (2016), we

construct variables which can be used to measure whether the patent filed is exploitative

or explorative. According to Brav et al. (2017) and Lin et al. (2016), a patent filed by

inventors in China is considered an explorative patent if at least 70% of its citations are

not from existing knowledge, which includes patents that the firm produced or were

cited by patents filed by the firm during the previous five years (cn_explor_r). In

contrast, a patent is considered exploitative if a minimum of 80% of its citations are

from existing knowledge, which includes patents that the firm produced itself or were

cited by patents filed by the firm during the previous five years (cn_exploi_r). The

descriptive results of the share of explorative and exploitative patents filed by sample

firms are reported in Appendix C4, and show that the share of explorative patents filed

with Chinese inventors is higher than the share of exploitative patents.

After reviewing a firm’s official website, its annual report, and the Factiva database, the

year when a firm established its official R&D centre is confirmed. In order to deal with

the potential effects of outliers, variable “ln_rnd_year” is obtained by a log

transformation of one plus the number of years that firm has R&D centre established in

China. We control for company size as larger firms are more readily to offshoring

advanced activities (Bardhan & Jaffee, 2005). We also log transform the number of

employees because it is highly skewed to represent the firm size in this paper. Scholars

have long highlighted that R&D intensity indicates the strategic importance of

innovation to a firm (O'Brien, 2003), which could affect a firm’s R&D strategies,

therefore we controlled for a firm’s R&D spending by using R&D intensity as a control

variable (Salomon & Shaver, 2005). R&D intensity is calculated by using the R&D

expenditure divided by the sales revenue in the same year. We used Return on Assets

(ROA) to control for the potential influence that firm’s performance may have on

innovation activities (Lee, et al., 2014). Since a time lag exists to turn investment

(R&D) into output (patent application) (Kondo, 1999; Bolívar-Ramos, 2017), we use

the previous year’s data of firm size, R&D intensity and ROA to match the patent data

consistently with methods used in previous studies (Lee, et al., 2014; Artz, et al., 2010).

The patent characteristic variable and firm characteristic variables are used as

explanatory variables for analysing their influences on the choices of TB and TA

186

strategies, while they are used as control variables for testing the influencing factors

behind the choices of MS and TE strategies. Table 5.2 presents a summary of the

definition and operationalisation of the variables used in the regression models.

Table 5.2: Variables definition and operationalisation. Variable

name

Value Notes

Dependent

variable

TB_r The share of cases that adopted “technology building” strategy: The number of cases of strategy “technology building” divided by the total number of cases of all location strategies.

MS_r The share of cases that adopted “market seeking” strategy: The number of cases of strategy “market seeking” divided by the total number of cases of all location strategies.

TA_r The share of cases that adopted “technology augmenting” strategy: The number of cases of strategy “technology augmenting” divided by the total number of cases of all location strategies.

TE_r The share of cases that adopted “technology exploiting” strategy: The number of cases of strategy “technology exploiting” divided by the total number of cases of all location strategies.

Independent

variables

home_ip 0 = not on the list; -1 = on the watch list; -2 = on the priority watch list; -3 = on the priority foreign country list or under Section 306 Monitoring.

Control variables for dependent variables TB_r and TA_r; Explanatory variables for dependent

variables MS_r and TE_r

host_ip 0 = not on the list; -1 = on the watch list; -2 = on the priority watch

list; -3 = on the priority foreign country list or under Section 306 Monitoring.

host_rol Reflects perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence. Estimate of governance (ranges from approximately -2.5 (weak) to 2.5 (strong) governance performance).

institu_dis Sum of differences between Kaufmann institutional indicators of host country and home country of sourcing firm (indicators: voice and accountability, political stability, government effectiveness, regulatory quality, rule of law, control of corruption).

cn_explor_r The share of explorative patents filed by inventors in China: a patent is considered an explorative patent if a minimum of 70% of the citations it refers are not from existing knowledge, which includes patents that

the firm produced or were cited by patents filed by the firm during the previous five .

Explanatory variables for dependent variables TB_r and

TA_r; Control variables for dependent variables MS_r and TE_r

cn_exploi_r The share of exploitative patents filed by inventors in China: a patent is considered exploitative if a minimum of 80% of the citations it refers are from existing knowledge, which includes patents that the firm produced itself or were cited by patents filed by the firm during the previous five years.

ln_rnd_year Natural log of one plus the number of years that firm has R&D centre established in China.

rrnd R&D intensity= R&D spending / sales revenue

ln_emp Natural log of the total number of employees

roa Return on assets

Note: “_r” after the name indicates the variable is a ratio.

187

5.5.2 What factors affect the location strategies that firms adopted in China?

In this section we present the results of the regression models which test the effect of

the IPR protection strength of firm’s home country and China, the quality of rule of law

of China, and the institutional distance between firm’s home country and China on the

choice of location strategies. Since the dataset in this section is longitudinal, in order to

control for bias which may be caused by unobserved characteristics of the individual

firms, we adopt a fixed effects regression model (Allison, 2009). The IPR protection

strength of our sample pharmaceutical firms after R&D centres established in China

stays at a constant level (i.e. none of the firm’s home country is on the Watch List of

special 301 report), so this variable is omitted from the regression test because of

invariability. Therefore, the influence that the IPR protection strength of firm’s home

country has on the choices of location strategies can only be tested for firms in the

computer and electronics industry. Tables 5.3 and 5.4 report the descriptive statistics

and the correlation matrix of the explicative variables included in the analysis, no

correlation is higher than 0.5, except that the correlation between TA and TE strategies

for electronics firms is -0.648. Variance inflation factor (VIF) test is also calculated to

further check the collinearly among variables, we found that the range of VIF scores of

the independent variables is between 1.05 and 1.5098, which indicates absence of

collinearity (lower than 10) (Wooldridge, 2012).

98 The correlation between TE and TA of computer and electronics industry is -0.648, which could be

indicative of some collinearity between these two variables. However, after including all the dependent

variables in one OLS model, the VIF scores of all the variables are between 1.06 to 2.83, which indicates

absence of collinearity.

188

Table 5.3: Descriptive statistics and correlations for explanatory and control variables: the share of four location strategies that firms adopted in China

in electronics industry.

Variable Obs . Mean Std.

Dev.

Min Max 1a 1b 1c 1d 2 3 4 5a 5b 6 7 8 9 10

1a TB_r 622 0.279 0.024 0 0.333 1.000

1b MS_r 622 0.181 0.029 0 0.210 0.112* 1.000

1c TA_r 622 0.329 0.054 0 0.493 -0.043 -0.285* 1.000

1d TE_r 622 0.208 0.040 0 0.270 0.342* 0.102 -0.648* 1.000

2 host_ip 622 -2.151 0.358 -3 -2 0.167* 0.244* -0.672* 0.600* 1.000

3 host_rol 622 -0.504 0.070 -0.639 -0.407 -0.074 -0.246* 0.225* 0.016 0.062 1.0000

4 home_ip 622 -0.092 0.358 -2 0 0.088 0.169* 0.002 0.028 0.017 -0.070 1.000

5a cn_explor_r 622 0.399 0.361 0 1 0.080 -0.113* 0.123* 0.064 0.104* 1.000

5b cn_exploi_r 622 0.052 0.131 0 1 0.074 -0.010 -0.023 -0.059 0.045 1.000

6 ln_rnd_year 622 1.818 0.727 0 3.367 0.155* 0.169* -0.411* 0.378* 0.394* 0.157* 0.152* 0.165* 0.164* 1.000

7 Institu_dis 622 11.263 1.352 6.375 15.215 -0.043 -0.016 -0.044 -0.017 -0.032 -0.083 -0.091 0.070 -0.053 0.041 1.000

8 rrnd 622 0.105 0.076 0.000 0.779 0.053 0.051 0.039 -0.015 -0.052 0.006 0.208* 0.144* 0.042 0.114* 0.086 1.000

9 ln_emp 622 3.174 1.180 0.247 5.891 0.032 -0.040 0.039 -0.021 -0.060 -0.007 -0.031 0.119* 0.023 0.261* -0.047 -0.211* 1.000

10 roa 622 4.511 10.340 -79.92 33.8 0.049 0.010 -0.025 0.070 0.044 -0.139* -0.056 0.047 0.054 0.067 0.045 -0.179* -0.024 1.000

Note: * p<.01

189

Table 5.4: Descriptive statistics and correlations for explanatory and control variables: the share of four location strategies that firms adopted in China

in pharmaceutical industry.

Variable Obs . Mean Std.

Dev.

Min Max 1a 1b 1c 1d 2 3 4 5a 5b 6 7 8 9 10

1a TB_r 174 0.302 0.046 0.218 0.381 1.000

1b MS_r 174 0.140 0.031 0.029 0.192 -0.255* 1.000

1c TA_r 174 0.410 0.051 0.333 0.588 -0.446* -0.481* 1.000

1d TE_r 174 0.148 0.036 0.071 0.217 -0.400* 0.141 -0.442* 1.000

2 host_ip 174 -2.115 0.320 -3 -2 -0.152 0.511* -0.309* 0.187 1.000

3 host_rol 174 -0.507 0.070 -0.639 -0.407 -0.400* -0.021 0.148 0.308* 0.033 1.000

4 home_ip 174 0 0 0 0 . . . . . . 1.000

5a cn_explor_r 174 0.359 0.313 0 1 0.061 0.007 -0.081 -0.001 . 1.000

5b cn_exploi_r 174 0.186 0.200 0 1 0.115 -0.082 0.153 -0.022 . 1.000

6 ln_rnd_year 174 1.772 0.781 0 3.091 -0.070 0.161 -0.192 0.219* 0.313* 0.244* . -0.111 0.073 1.000

7 Institu_dis 174 11.850 1.295 7.978 14.706 0.035 -0.028 0.103 -0.164 -0.163 -0.090 . -0.099 0.055 -0.130 1.000

8 rrnd 174 0.150 0.045 0.052 0.496 -0.141 0.158 0.005 0.033 0.273* 0.022 . 0.081 0.087 -0.152 -0.042 1.000

9 ln_emp 174 3.770 1.211 -0.330 4.910 -0.025 -0.034 0.095 -0.073 -0.060 -0.003 . 0.091 0.086 -0.181 0.209* -0.057 1.000

10 roa 174 11.120 7.515 -8.31 38.95 0.012 -0.053 0.039 -0.024 -0.022 -0.036 . -0.080 0.103 -0.149 0.364* -0.042 0.270* 1.000

Note: * p<.01

190

Tables 5.5 and 5.6 shows the baseline models testing the effects of the control variables

on the share of different location strategies that MNCs adopted in China. The main

results of the fixed effects regression in Table 5.5 show that the IPR protection strength

in China is negatively related to the share of TB and TA strategies for firms in both

industries, except that it has a significant positive effect on TB strategy for electronics

firms. The IPR protection strength in firm’s home country negatively impacts the share

of TB and TA strategies. The quality of rule of law in China has a positive effect on the

share of TA strategy, but a negative effect on the share of TB strategy for firms in both

industries. The longer the institutional distance between firm’s home country and China,

the higher the share of TA strategy for pharmaceutical firms, but the lower the share of

TA strategy for electronics firms. The results in Table 5.6 show that the longer the

experience in conducting R&D activities in China, the higher the share of MS strategy

and TE strategy for firms in both industries. In addition, firm size has a significant

positive effect on TE strategy, but negative effect on MS strategy for computer and

electronics firms.



technology augmenting strategies adopted in China (baseline).

Technology building Technology augmenting

Model 1a

(electronics

industry)

Model 1b

(pharma

industry)

Model 2a

(electronics

industry)

Model 2b

(pharma

industry)

cn_explor_r

cn_exploi_r

ln_rnd_year

rrnd

ln_emp

roa

Control

host_ip 0.014*** (0.003) -0.026* (0.013) -0.098*** (0.004) -0.027† (0.014)

host_rol -0.025† (0.014) -0.283*** (0.055) 0.196*** (0.023) 0.189** (0.063)

home_ip -0.021*** (0.005) 0 (omitted) -0.027** (0.008) 0 (omitted)

Institu_dis 0.002 (0.029) -0.010 (0.014) -0.014** (0.004) 0.037* (0.016)

-cons 0.268 (0.029) 0.219 (0.143) 0.369*** (0.047) 0.014 (0.163)

n (obs) 622 174 622 174

N (groups) 58 21 58 21

F stat 10.76*** 11.69*** 153.29*** 6.78***


191



exploiting strategies adopted in China (baseline). Market seeking Technology exploiting

Model 3a

(electronics

industry)

Model 3b

(pharma

industry)

Model 4a

(electronics

industry)

Model 4b

(pharma

industry)

host_ip

host_rol

home_ip

Institu_dis

Control

cn_exploi_r 0.018† (0.010) 0.011 (0.014) -0.015 (0.011) -0.034* (0.016)

ln_rnd_year 0.014*** (0.002) 0.015*** (0.004) 0.0435*** (0.002) 0.025*** (0.005)

rrnd 0.038 (0.044) 0.113 (0.072) 0.019 (0.050) -0.044 (0.083)

ln_emp -0.010* (0.004) -0.001 (0.019) 0.012* (0.005) -0.003 (0.021)

roa 0.000 (0.000) -0.000 (0.000) 0.001*** (0.000) 0.000 (0.001)

-cons 0.182*** (0.013) 0.102 (0.070) 0.102*** (0.016) 0.132 (0.080)

n (obs) 622 174 622 174

N (groups) 58 21 58 21

F stat 10.91*** 4.24** 67.71*** 6.38***


Tables 5.7 and 5.8 report the results of the full models. The stronger the IPR protection

strength of China is, the lower the share of TB strategy (Models 5a & 5b) for

pharmaceutical firms. The results indicate that that the older the R&D centres in China

for computer and electronics firms, the higher the share of TB strategy. With regard to

the influence of IPR protection strength of firm’s home country, the results indicate that

the stronger the IPR protection in computer and electronics firm’s home country, the

lower the share of TB strategy of MNCs in China. It can be noted that the quality of rule

of law in China is also negatively related to the share of TB strategy for firms in both

industries.

Models 6a and 6b show that the age of R&D centres in China is negatively related to the

share of TA strategy for firms in both industries, while the share of explorative patents

and firm size have a negative impact on the share of TA strategy for computer and

electronics firms. Regarding the influences of institutional factors, the results show that

the stronger the IPR protection of China, the lower the share of TA strategy adopted by

firms in computer and electronics industry. The influence of the IPR protection strength

of firm’s home country is not significant. The results show that with one standard

deviation increase in the quality of rule of law in China, the share of TA strategy will

increase 2.18% for computer and electronics firms, while it will increase 1.83% for

192

pharmaceutical firms. In addition, the institutional distance between a firm’s home

country and China can drive the choice of TA strategy for firms in pharmaceutical

industry.

Regarding the factors influencing the choice of MS strategy (Models 7a and 7b), the

stronger the IPR protection strength in China, the higher the share of MS strategy of

MNCs in China for pharmaceutical firms. The quality of rule of law in China negatively

impacts the share of MS strategy for computer and electronics firms. The results also

show that the bigger the institutional distance between firm’s home country and China,

the higher the share of MS strategy for firms in pharmaceutical industry. The age of the

R&D centres in China has significant effect on the choice of MS strategy for firms in

computer and electronics industry, while firm size shows negative effect.

The fixed effects regression results also show that TE strategy (Models 8a and 8b) is

motivated by the IPR protection strength of China and the institutional distance between

firm’s home country and China for computer and electronics firms, while the IPR

protection strength of firm’s home country and the quality of rule of law in China are

negatively related to the share of TE strategy for firms in computer and electronics

industry. As for pharmaceutical firms, the results show that the share of TE strategy will

be higher if the institutional distance between firm’s home country and China is smaller.

IPR protection strength of China has a negative effect on the share of TE strategy,

although with lower significance level. The results indicate that the age of R&D centres

in China in both industries has positive effect on the share of TE strategy, while firm

size and firm performance has positive impact on computer and electronics firm’s TE

strategy.

To summarise the results from the fixed effects regressions above, stronger IPR

protection in China has positive effect on the share of TE strategy for firms in computer

and electronics industry, while having a negative effect on the share of TA strategy. The

strength of IPR protection in China also has a positive effect on the share of MS

strategy for pharmaceutical firms, but a negative effect on the share of TB strategy. The

better the quality of rule of law in China is, the higher the share of TA strategy, but the

lower the share of TB strategy for firms in both industries. The quality of rule of law

also has a negative effect on the share of MS strategy and TE strategy for computer and

electronics firms. For computer and electronics firms, the IPR protection strength of

firm’s home country has a negative effect on the share of TB strategy and TE strategy.

193

The institutional distance between firm’s home country and China is positively related

to the share of MS and TA strategy for pharmaceutical firms, and it also has a positive

impact on the share of TE strategy for firms in computer and electronics firms but has a

negative impact for pharmaceutical firms. The age of R&D centres in China is

negatively related to the share of TA strategy for firms in both industries, but is

positively related to the share of TB strategy for electronics firms. Finally, the share of

explorative patents and firm size have a negative impact on the share of TA strategy for

computer and electronics firms.



technology augmenting strategies adopted in China.

Technology building Technology augmenting

Model 5a

(electronics

industry)

Model 5b

(pharma industry)

Model 6a

(electronics

industry)

Model 6b

(pharma industry)

cn_explor_r -0.001 (0.003) 0.011 (0.012) -0.008* (0.004) -0.001 (0.013)

ln_rnd_year 0.007** (0.002) 0.009 (0.008) -0.046*** (0.003) -0.034*** (0.008)

rrnd 0.045 (0.036) -0.129 (0.110) -0.070 (0.047) 0.145 (0.119)

ln_emp 0.003 (0.004) 0.025 (0.027) -0.010* (0.005) -0.014 (0.030)

roa 0.000 (0.000) 0.000 (0.001) -0.000 (0.000) 0.000 (0.001)

Control

host_ip -0.005 (0.004) -0.033* (0.016) -0.040*** (0.005) 0.007 (0.017)

host_rol -0.040** (0.015) -0.309*** (0.058) 0.311*** (0.019) 0.261*** (0.063)

home_ip -0.024*** (0.005) 0 (omitted) -0.010 (0.007) 0 (omitted)

Institu_dis 0.001 (0.003) -0.010 (0.014) -0.004 (0.004) 0.029† (0.015)

-cons 0.229*** (0.032) 0.094 (0.183) 0.574*** (0.042) 0.301 (0.197)

n (obs) 622 174 622 174

N (groups) 58 21 58 21

F stat 6.54*** 5.12*** 143.49*** 5.66***


194



exploiting strategies adopted in China.

Market seeking Technology exploiting

Model 7a

(electronics

industry)

Model 7b

(pharma industry)

Model 8a

(electronics

industry)

Model 8b

(pharma industry)

host_ip 0.004 (0.004) 0.050*** (0.010) 0.033*** (0.005) -0.020† (0.012)

host_rol -0.131*** (0.018) 0.012 (0.037) -0.054** (0.020) 0.033 (0.043)

home_ip 0.010 (0.006) 0 (omitted) -0.029*** (0.007) 0 (omitted)

Institu_dis 0.001 (0.003) 0.022* (0.009) 0.008* (0.004) -0.040*** (0.011)

Control

cn_exploi_r 0.012 (0.009) -0.002 (0.013) -0.012 (0.011) -0.027† (0.015)

ln_rnd_year 0.015*** (0.003) 0.005 (0.005) 0.026*** (0.003) 0.020** (0.006)

rrnd 0.034 (0.041) 0.009 (0.071) 0.033 (0.047) -0.031 (0.083)

ln_emp -0.010* (0.004) -0.004 (0.017) 0.010* (0.005) -0.000 (0.020)

roa -0.000 (0.000) -0.001 (0.000) 0.001** (0.000) 0.000 (0.000)

-cons 0.116** (0.037) -0.005 (0.118) 0.069 (0.043) 0.577*** (0.137)

n (obs) 622 174 622 174

N (groups) 58 21 58 21

F stat 15.25*** 6.51*** 52.05*** 7.38***


5.5.3 Robustness Check

Since these four location strategies may be adopted simultaneously in a company, and

they are built as relative measures, the sum of the four location strategies equals to

100%. Given that the independent variables included in each model are the same, in

order to control for potential bias or correlation (e,g., the correlation between TA and

TE of electronics firms is -0.648, while the correlations between other dependent

variables are lower than 0.5), we adopt the Seemingly Unrelated Regression (SUR)

model (Finney, et al., 2005; Chang & Thomas, 1989) for robustness check. The

rationale behind such choices is that the SUR model exploits any contemporaneous

correlations that exist across the regression equations (Holthausen & Assmus, 1982),

and it is also considered an appropriate model for analysing repeated measurements of a

dependent variable in its relationship with a fixed set of time-varying explanatory

variables (Freese, et al., 2011). Tables 5.09 and 5.10 report the regression results of

using the SUR model. It can be noted that the results are consistent with the results of

using the fixed-effects regression model, which indicates that our main test results are

robust.

195


respectively. Dependent variable: the share of technology building and technology

augmenting strategies adopted in China. Technology building Technology augmenting

Model 5a

(electronics industry)

Model 5b

(pharma industry)

Model 7a


Model 7b

(pharma industry)

cn_explor_r -0.000 (0.003) 0.005 (0.010) -0.006† (0.004) -0.005 (0.010)

ln_rnd_year 0.007** (0.002) 0.009 (0.007) -0.046*** (0.003) -0.034*** (0.008)

rrnd 0.045 (0.034) -0.125 (0.100) -0.070 (0.044) 0.147 (0.108)

ln_emp 0.003 (0.003) 0.023 (0.025) -0.010* (0.004) -0.015 (0.027)

roa 0.000 (0.000) 0.000 (0.001) -0.000 (0.000) 0.000 (0.001)

Control

host_ip 0.005 (0.004) -0.034* (0.015) -0.040*** (0.005) 0.006 (0.016)

host_rol -0.039** (0.014) -0.308*** (0.053) 0.310*** (0.019) 0.262*** (0.057)

home_ip -0.024*** (0.005) 0 (omitted) -0.010 (0.006) 0 (omitted)

Institu_dis 0.001 (0.003) -0.010 (0.013) -0.004 (0.003) 0.029* (0.014)

-cons 0.153*** (0.036) 0.069 (0.172) 0 (omitted) 0.303* (0.147)

n (obs) 622 174 622 174

Parms 66 28 67 28

RMSE 0.021 0.040 0.028 0.043

R-sq 0.163 0.226 0.731 0.293

Chi2 120.81 50.61 86137.87 72.51



respectively. Dependent variable: the share of market seeking and technology exploiting

strategies adopted in China. Market seeking Technology exploiting

Model 6a


Model 6b

(pharma industry)

Model 8a


Model 8b

(pharma industry)

host_ip 0.004 (0.004) 0.049*** (0.009) 0.033*** (0.005) -0.021† (0.011)

host_rol -0.131*** (0.166) 0.013 (0.034) -0.052** (0.019) 0.034 (0.040)

home_ip 0.010† (0.006) 0 (omitted) -0.029*** (0.006) 0 (omitted)

Institu_dis 0.001 (0.003) 0.021* (0.008) 0.008* (0.003) -0.041*** (0.010)

Control

cn_exploi_r 0.011 (0.009) 0.013 (0.008) -0.001 (0.009) -0.013 (0.009)

ln_rnd_year 0.015*** (0.002) 0.005 (0.005) 0.026*** (0.003) 0.020*** (0.005)

rrnd 0.034 (0.039) 0.009 (0.065) 0.032 (0.045) -0.031 (0.075)

ln_emp -0.010* (0.004) -0.006 (0.016) 0.010* (0.004) -0.003 (0.018)

roa -0.000 (0.000) -0.001 (0.000) 0.000** (0.000) 0.000 (0.000)

-cons 0 (omitted) 0 (omitted) 0 (omitted) 0.553*** (0.128)

n (obs) 622 174 622 174

Parms 67 29 67 28

RMSE 0.025 0.026 0.029 0.030

R-sq 0.251 0.312 0.495 0.315

Chi2 32672.33 5191.60 33569.07 79.85


196

5.6 Discussion and conclusions

This paper analyses the evolution of location strategies that MNCs in pharmaceutical

and computer and electronics industries have adopted in China. Our results suggest that

although seeking technology resources (TA and TB) are the initial location strategies

MNCs chose, the importance of MS and TE is gradually increasing. We also addressed

the influence of institutional factors on the choices of location strategies, and find that

the quality of the IPR protection regime in China is positively related to the share of TE

strategies for computer and electronics firms and to the share of MS for pharmaceutical

firms.

With regard to the motives for multinationals to choose China as a location to conduct

innovation activities, our results partly support the findings from previous studies,

which stated that TA and TE are the main motives that drive MNCs to go abroad

(Laurens, et al., 2015; Le Bas & Sierra, 2002; Patel & Vega, 1999). For both electronics

and pharmaceutical firms that choose China to be the host country to conduct R&D

activities, TA was playing a dominant role before 2002. The results of firms in the

computer and electronics industry also confirmed that the importance of TA is gradually

overcome by TE. In addition, our results support Patel and Vega’s (1999) findings that

pharmaceutical firms are driven more by TA compared to electronics firms. However,

our results also differ from previous studies in several aspects. First of all, some studies

have stated that firms do not go abroad for acquiring the technologies that they are not

specialised in at home (Liu & Chen, 2012). Our results indicate that TB is one of the

important strategies for firms to choose China, especially for pharmaceutical firms,

indicating that even if China traditionally does not possess strong technological

competencies in pharmaceuticals, the country is becoming attractive to companies from

countries which do not possess these capabilities. According to the reports published by

the European Union (Breschi & Tarasconi, 2013) and the OECD (2015), which

calculates the RTA value of each technology fields of patents filed by applicants in

China, China enjoys a relative advantage of technology resources for computer and

electronics firms, but not for pharmaceutical firms. Our results show that the importance

of TB is gradually decreasing for firms in the computer and electronics industry, which

means that as China is gradually obtaining technology advantages in computer and

electronics, firms in this industry are more willing to locate the technologies that firm’s

197

home country has a relative specialisation in (TA and TE became the two dominant

strategies since 2003).

Second, the share of MS is very low in previous studies (Patel & Vega, 1999; Laurens,

et al., 2015), however, our results suggest that although during 1990 to 1996 MS was

not an important motive for firms to choose China, the importance of this location

strategy increased notably during the period from 2003 to 2008 for pharmaceutical

firms (for electronics firms it has notably increased during both 1997-2002 and 2003-

2008). Furthermore, TE was not an important motive for choosing China as host

country before 2002 for firms in both industries, but it gradually became one of the top

two motives since 2003 for electronics firms. Although the importance of TE has also

increased for pharmaceutical firms, its share is still lower than TB and TA strategies.

There are studies claiming that investments in China are more market-seeking to begin

with, and with a tendency to evolutionary learning-based upgrading in China (Bruche,

2009). However, our descriptive results show that technology seeking constitutes a big

part of motives for MNCs offshoring R&D activities to China, which is consistent with

the RBV theory. This is also supported by the results in Appendix C4, which show that

there is a higher share of explorative patents than exploitative patent that are filed by

inventors in China. Last but not least, Gao (2008) stated that the IPR regime in China

was greatly improved around 2001, when China joined WTO, which resulted in great

progress regarding building up a “modern, transparent, and effective” IP system, and

also helped China to integrate into the global economy. Regarding the evolution of the

share of location strategies adopted by MNCs in electronics firms and pharmaceutical

firms, there is a notable increase in the share of TE strategy during 2003 to 2008, after

the IP system was improved around 2001. Since TE strategy indicates locating the

technologies that firm has advantage at home relative to China, there could be a higher

risk of IP leakage if the IPR protection in China is weak. Therefore, the change of share

of TE strategy could be attributed to the improvement of the Chinese IP system.

Regarding the factors behind the choices different location strategies, our regression

results show that the IPR protection strength of China is positively related to the share

of MS and TE strategies, since both strategies represent offshoring R&D activities that

are comparatively weak in host countries. This indicates that when firms are planning to

conduct R&D activities in areas in which China is not specialised, they are more likely

to offshore such activities if the IPR regime in China is stronger. TB and TA strategies

198

are for offshoring technologies in which the host country is specialised. The regression

result for IPR protection strength in China shows that it is negatively related to the share

of both strategies. This could explain why the share of TA and TB strategies are

decreasing and the share of MS and TE strategies are increasing gradually, while IPR

protection in China has been improving since the amendment of the IP laws in 2000

(Awokuse & Yin, 2010). These results support our conceptual framework that

institutional theory should be applied to explain the choice of four varied location

strategies.

Since TE strategy also corresponds to a situation when the technology MNC has relative

specialisation in the home country, our results show that the IPR regime in a firm’s

home country is negatively related to the share of TE strategy, which indicates that

when the IPR protection strength in firm’s home country is strong, a firm will be more

reluctant to offshore the technologies with a relative advantage in the home country.

With regard to TB strategy, the regression results also show that the IPR protection

strength of China and firm’s home country, and the quality of rule of law in China, are

negatively related to the share of TB strategy. This may suggest that TB can be adopted

as an explorative R&D strategy to fully utilise the resources in countries with weak

legal systems, consistent with both RBV and institutional theory. As for TA strategy,

which means the technology offshored to China is a technology that both China and

firm’s home country have a relative specialisation, the results show that the IPR

protection strength of China is negatively related to the share of this strategy, but the

quality of rule of law is positively related. Building on insights from both RBV and

institutional theory, we suggest that when offshoring R&D activities in which both

home and host countries are specialised, the quality of rule of law in China matters

more for firms, but this is not the case for IPR protection.

Our results show that the strength of IPR protection in the host country is positively

associated to the location strategies for offshoring technologies in which the host

country has no specialisation, but negatively associated to location strategies about

offshoring technologies in which the host country is relatively more specialised.

Previous studies have stated that R&D activities conducted by MNCs in host country

have influences on the innovation performance of local firms (Liu & Buck, 2007).

Therefore, if China wishes to attract technologies in which it is comparatively weak,

improving the quality of IPR regime in China should be paramount. In addition, the

199

results show that institutional distance plays a different role for firms in the

pharmaceutical industry and the computer and electronics industry. The institutional

distance is negatively related to the share of TE strategy for pharmaceutical firm, but

positively related for computer and electronics firms. Since MNCs prefer to locate

operations in host countries with similar institutional environment (Flores & Aguilera,

2007), pharmaceutical firms should be conservative about choosing a location strategy

which is facing higher risk of IP leakage. This explains why when the institutional

distance with pharmaceutical firm’s home country is bigger, the share of TE strategy is

lower. The strength of IPR protection of firm’s home country is negatively related to the

share of TB strategy and TE strategy for firms in computer and electronics industry.

With regard to the quality of rule of law in China, it is only positively related to TA

strategy.

These results highlight the role of RBV and institutional factors on offshoring

innovation activities. Indeed, institutional factors have been extensively recognised in

IB studies as affecting MNCs’ strategies in host countries. This may indicate the need

for further analysis to investigate more complex relationships between these factors and

test the reciprocal moderating effect on technology strategies.

In conclusion, the contribution of this paper is two-fold: First, this study has focused on

analysing the evolution of the location strategies MNCs adopted when offshoring R&D

activities in China, and we believe this paper contribute in a novel way to a better

understanding to the strategic management of R&D activities in China by MNCs.

Second, we have extended previous works regarding location strategies (Patel & Vega,

1999; Le Bas & Sierra, 2002; Laurens, et al., 2015), over a substantially longer period

of time and tested in the analysis the influence of institutional factors (i.e. IPR

protection strength of home and host countries, quality of rule of law, and institutional

distance) on the choices of these location strategies. The findings of this paper can

provide guidance to decision makers in corporations regarding what factors need to be

considered when making decisions regarding offshoring R&D activities to China, and

how to organise these R&D activities. For example, since our results show that the

strength of IPR protection in the host country is positively associated to the location

strategies for offshoring technologies in which the host country has comparative

disadvantage, firms should adopt such types of strategies in countries with stronger IPR

protection. Firms could adopt strategies like TA and TB to explore the technology

200

advantages in host countries which have weak IPR protection. In addition, the findings

of this paper could also give insight to policy makers in host countries for attracting

offshoring R&D activities. For example, if emerging countries like China want to attract

technologies in which they are comparatively weak, policy makers in such countries

should improve the quality of IPR regime.

This study has some limitations that could be addressed in further research: first, our

findings are based on MNCs in computer and electronics industry and pharmaceutical

industry, which are both knowledge-intensive industries but also present different

characteristics (e.g., pharmaceutical firms may face higher financial loss for IP

infringement than computer and electronics firms). Future studies could include more

industries and test the validity of our findings. Second, this study is only focused on

China, other host countries could also be included in future research to test whether

MNCs react differently in different institutional context, and compare the differences

between China and other countries.

201

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208

Appendix C1: The data details of share of location strategies (4 intervals)

Table C1.1: The share of each location strategies of electronics firms.

Host

country

90-96 97-02 03-08 09-14

No. % No. % No. % No. %

China TA 25 35.71% 58 26.13% 111 22.84% 128 23.19%

MS 8 11.43% 42 18.92% 116 23.87% 127 23.01%

TA 34 48.57% 84 37.84% 132 27.16% 147 26.63%

TE 3 4.29% 38 17.12% 127 26.13% 150 27.17%

Total 70

222

486

552

Other TA 161 32.14% 268 32.64% 257 26.31% 293 29.04%

MS 85 16.97% 120 14.62% 187 19.14% 161 15.96%

TA 100 19.96% 147 17.90% 184 18.83% 196 19.43%

TE 155 30.94% 286 34.84% 349 35.72% 359 35.58%

Total 501 821 977 1,009

Table C1.2: The share of each location strategies of pharmaceutical firms.

Host

country

90-96 97-02 03-08 09-14

No. % No. % No. % No. %

China TA 16 34.78% 32 36.36% 36 28.35% 42 30.43%

MS 4 8.70% 14 15.91% 32 25.20% 26 18.84%

TA 20 43.48% 34 38.64% 37 29.13% 44 31.88%

TE 6 13.04% 8 9.09% 22 17.32% 26 18.84%

Total 46 88 127 138 Other TA 89 33.71% 106 32.62% 106 30.03% 86 30.07%

MS 34 12.88% 55 16.92% 76 21.53% 61 21.33%

TA 63 23.86% 60 18.46% 68 19.26% 54 18.88%

TE 78 29.55% 104 32.00% 103 29.18% 85 29.72%

Total 264 325 353 286

209

Appendix C2: The share of location strategies (5 intervals)

Figure C2.1: The evolvement of the share of each location strategies of electronics firms

(host country: China).

Figure C2.2: The evolvement of the share of each location strategies of pharmaceutical

firms (host country: China).

3.03%

11.02%

23.08%25.27%

28.57%

48.48%

40.16%

31.41% 30.02%

25.33%

3.03%

11.02%

21.79% 22.68% 23.24%

45.45%

37.80%

23.72%

22.03% 22.86%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

9 0 - 9 4 9 5 - 9 9 0 0 - 0 4 0 5 - 0 9 1 0 - 1 4

TE

TA

MS

TB

31.25%

44.12%

35.42%

29.75%32.56%

50.00%

27.94%

32.29%

28.10%30.23%

6.25%

16.18%18.75%

15.70%19.38%

12.50% 11.76%13.54%

26.45%

17.83%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

9 0 - 9 4 9 5 - 9 9 0 0 - 0 4 0 5 - 0 9 1 0 - 1 4

TA

TB

TE

MS

210




firms


29.23%

34.01% 33.37%

36.45%34.97%35.64%

30.25%

33.60%

26.67%28.91%

18.46%19.59%

18.58% 18.60%19.73%

16.67% 16.14%14.45%

18.28%16.39%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

9 0 - 9 4 9 5 - 9 9 0 0 - 0 4 0 5 - 0 9 1 0 - 1 4

TE

TB

TA

MS

31.58%29.93% 30.15%

28.84%

31.60%33.33%

31.69%

27.76%29.78% 29.00%

14.04% 13.38%

22.69%21.63% 20.82%21.05%

25.00%

19.40% 19.75%18.59%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

9 0 - 9 4 9 5 - 9 9 0 0 - 0 4 0 5 - 0 9 1 0 - 1 4

TE

TB

MS

TA

211

Appendix C3: The share of location strategies (yearly)


(host country: China; the year with less than 30 observations are removed).


firms

(host country: China; the year with less than 30 observations are removed).

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

TB

TA

TE

MS

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

TA

TB

TE

MS

212


(host country: other; the year with less than 30 observations are removed).


firms

(host country: other; the year with less than 30 observations are remove).

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

TE

TB

TA

MS

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

TB

TE

TA

MS

213

Appendix C4: Exploitative patent vs. explorative patent

Figure C4.1: Share of exploitative and explorative patents filed by inventors in China of

firms in both pharmaceutical industry and computer and electronics industry.

Figure C4.2: Share of exploitative and explorative patents filed by selected firms.

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

9 0 - 9 6 9 7 - 0 2 0 3 - 0 8 0 9 - 1 4

Explorative(electronics, China)

Explorative(pharma, China)

Exploitative(pharma, China)

Exploitative(electronics, China)

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

9 0 - 9 6 9 7 - 0 2 0 3 - 0 8 0 9 - 1 4

Explorative(electronics)

Exploitative(electronics)

Exploitative(pharma)

Explorative(pharma)

214

Figure C4.3: Share of exploitative and explorative patents filed by inventors in firm’s

home country.

Figure C4.4: Share of exploitative and explorative patents filed by inventors in all the

other countries except China.

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

9 0 - 9 6 9 7 - 0 2 0 3 - 0 8 0 9 - 1 4

Explorative(electronics, home country)

Exploitative(pharma, home country)

Explorative(pharma, home country)

Exploitative(electronics, home country)

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

9 0 - 9 6 9 7 - 0 2 0 3 - 0 8 0 9 - 1 4

Explorative(electronics, other countries)

Exploitative(pharma, other countries)

Explorative(pharma, other countries)

Exploitative(electronics, other countries)

215

Figures C4.5: Share of exploitative patents filed by inventors in all the other countries

and China in computer and electronics industry.

Figures C4.6: Share of explorative patents filed by inventors in all the other countries

and China in computer and electronics industry.

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

9 0 - 9 6 9 7 - 0 2 0 3 - 0 8 0 9 - 1 4

Exploitative(electronics)

Exploitative(electronics, home country)

Exploitative(electronics, other countries)

Exploitative(electronics, China)

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

9 0 - 9 6 9 7 - 0 2 0 3 - 0 8 0 9 - 1 4

Explorative(electronics, other countries)

Explorative(electronics, China)

Explorative(electronics, home country)

Explorative(electronics)

216

Figures C4.7: Share of exploitative patents filed by inventors in all the other countries

and China in pharmaceutical industry.

Figures C4.8: Share of explorative patents filed by inventors in all the other countries

and China in pharmaceutical industry.

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

9 0 - 9 6 9 7 - 0 2 0 3 - 0 8 0 9 - 1 4

Exploitative(pharma, home country)

Exploitative(pharma, other countries)

Exploitative(pharma)

Exploitative(pharma, China)

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

50.00%

9 0 - 9 6 9 7 - 0 2 0 3 - 0 8 0 9 - 1 4

Explorative(pharma, other countries)

Explorative(pharma)

Explorative(pharma, home country)

Explorative(pharma, China)

217

Appendix C5: Fixed effects regression results of pharmaceutical industry and electronics industry respectively

Table C5.1: Dependent variable: the share of four location strategies that firms adopted in China (until 2010).

Technology building Market seeking Technology augmenting Technology exploiting

Model 5a

(electronics

industry)

Model 5b

(pharma industry)

Model 6a

(electronics

industry)

Model 6b

(pharma industry)

Model 7a

(electronics

industry)

Model 7b

(pharma industry)

Model 8a

(electronics

industry)

Model 8b

(pharma industry)

host_ip 0.004 (0.005) -0.070*** (0.011) 0.013* (0.006) 0.040** (0.014) -0.027*** (0.006) 0.039 (0.026) 0.012* (0.006) -0.007 (0.014)

host_ruleoflaw -0.032 (0.020) -0.669*** (0.043) -0.075** (0.028) -0.018 (0.057) 0.389*** (0.028) 0.432*** (0.105) -0.213*** (0.026) 0.232*** (0.058)

home_ip -0.024** (0.007) 0 (omitted) 0.030** (0.009) 0 (omitted) -0.016† (0.009) 0 (omitted) -0.026** (0.009) 0 (omitted)

Institu_dis -0.000 (0.003) -0.043*** (0.010) 0.002 (0.005) 0.023† (0.012) 0.010 (0.005) 0.045† (0.023) 0.001 (0.004) -0.028* (0.013)

Control

cn_explor_r -0.001 (0.004) 0.022* (0.010) -0.005 (0.006) -0.009 (0.024)

cn_exploi_r 0.005 (0.016) -0.016 (0.019) -0.009(0.015) -0.026 (0.019)

ln_rnd_year 0.006 (0.004) 0.021** (0.007) 0.004 (0.005) 0.019* (0.009) -0.045*** (0.005) -0.053** (0.017) 0.038*** (0.005) 0.017† (0.009)

rrnd 0.040 (0.043) -0.082 (0.066) 0.025 (0.058) 0.002 (0.086) -0.120* (0.058) 0.143 (0.160) 0.044 (0.055) -0.076 (0.087)

ln_emp 0.007 (0.005) 0.048* (0.023) -0.015* (0.007) -0.021 (0.031) -0.022** (0.007) 0.015 (0.057) 0.021** (0.007) -0.019 (0.032)

roa 0.000 (0.000) 0.001† (0.000) -0.000 (0.000) -0.001† (0.001) -0.000 (0.000) 0.001 (0.001) 0.000 (0.000) 0.000 (0.001)

-cons 0.234*** (0.042) 0.089 (0.135) 0.180** (0.057) 0.010 (0.179) 0.633*** (0.057) 0.190 (0.329) -0.030 (0.054) 0.649** (0.181)

n (obs) 392 100 392 100 392 100 392 100

N (groups) 57 14 57 14 57 14 57 14

F stat 3.75*** 42.05*** 5.35*** 5.14*** 78.69*** 3.16** 38.70*** 10.65***


218

Chapter 6 Conclusions

The main research question motivating this study was “do institutional factors influence

the offshoring innovation activities? And specifically, what is the role of IPR for

offshoring of innovation?”. The three research papers presented in this thesis have

analysed the role that institutions (especially IPR) play on offshoring innovation

activities from three different aspects. This chapter summarises the key findings of the

thesis, and its contributions and possible implications. We also discuss the limitations of

this research and account for future research directions. This chapter is organised as

follows: Section 6.1 brings together the main findings of the three papers; Section 6.2

highlights the contributions of the thesis to the extant literature and its potential

implications; Section 6.3 discusses the limitations of this research and suggests future

research directions.

6.1 Summary of findings

This thesis aims to identify the influences institutions have on offshoring innovation

activities, especially the influence of IPR. We have analysed their effects from three

different but interrelated dimensions. First, we carried out a detailed analysis of the

evolution of the Chinese IP system from the perspective of both the written law and the

law in practice, and the seemingly coevolving innovation activities in China over the

period 1980s-2017. Second, we tested the relationships between institutional factors

(especially IPR) and offshore governance choices, as well as their effects on achieving

certain business outcomes (i.e., focus on core competencies, access to qualified

personnel, improve organisational flexibility, increase in firm’s overall competitiveness,

increase productivity/efficiency, improve service quality, better access to new markets,

and breakthrough process improvement(s)). Third, we focussed on MNCs in the

pharmaceutical and computer and electronics industries which have established R&D

centres in China, analysed the evolution of their location strategies, and tested the effect

that institutions (in particular IPR) have on the choice of location strategies. The main

findings of each dimension are discussed in more detail below.

219

6.1.1 Summary of findings: The evolution of the Chinese IPR system - Phases of

changes and impact on innovation and international business

Institutional theory suggests that the success of business activities is affected by its

institutional environment (Scott, 2008), and therefore it is important to consider its

influence when analysing MNCs’ offshoring activities. The IPR regime of a country is a

vital factor to MNCs which offshore innovation activities as it affects MNCs’ offshore

governance choices and R&D strategies (Bardhan & Jaffee, 2005; Oxley, 1999).

Despite China being an attractive offshoring destination, the status and quality of its

IPR regime remains unclear, and few studies have comprehensively studied it.

We developed an assessment scheme with five dimensions (i.e., the scope of protection,

the duration of protection and clarity of procedural provisions, enforcement

mechanisms, protection strength of IPR, and the restrictions on IPR) based on the work

of Ginarte and Park (1997), which is used to identify whether the revisions have

improved the quality of IP laws in China. By using this framework to analyse each

provision that has been amended, we note that new amendments are issued for the

Patent law, the Trademark law, and the Copyright law around the year 2000, when

China was trying to become a member of WTO. The changes that were implemented

over this time almost covered the five aspects described above. They expanded the

scope of IP protection by including more objects or acts that can be protected by law,

simplified the procedures related to application, approval, re-examination and dispute

solving, increased the amount of compensation, authorised more power to both

administrative and judiciary authorities for stronger IP enforcement, and also perfected

the provision related to IP rights restrictions. It can be concluded that the revisions made

in this period have resulted in radical improvement to the Chinese IP laws. Based on

this solid foundation, all the three IP laws were revised again in 2008, and our analysis

show that the quality of IP laws (both Patent law and Trademark law) were further

improved.

With regard to the IP enforcement in China, the results show that the number of patent

related cases handled by the State Intellectual Property Office and the amount of fines

imposed on each trademark infringement case continues to increase, which suggest that

the IP enforcement conducted by related administrative authorities is strengthening. The

number of IP related cases of first instance accepted and concluded by local people’s

courts also continues to increase, and the number of IPR-related criminal cases

220

concluded and the number of suspects sentenced in such cases is increasing gradually as

well. This indicates that the IP enforcement is strengthening, and the previous situation

of little to no criminal convictions for IP infringement which scholars have highlighted

in their studies is also improving. It is interesting to note that the number of cases

involving foreigners or foreign enterprises which are handled by courts constitutes only

a small proportion of the total number of cases, suggesting that most of the IP related

disputes happened between local people or enterprises. Furthermore, we reviewed the IP

activities in China by analysing the number of patent applications and patents granted,

and the number of applications of trademark registration. The results show that IP

activities remained at a low level before the year 2000, but from then a tremendous

increase started, which further accelerated after 2008, indicating that IP activities are

coevolving with the IP system development in China. These findings therefore provide

a comprehensive and updated understanding of the Chinese IP system.

6.1.2 Summary of findings: The influences that institutional environment in host

countries have on the choice of offshore governance mode and firm performance

Governance choices could affect MNC’s performance, and are considered important

strategic decisions when offshoring business functions (Hutzschenreuter, et al., 2011).

In Chapter 4 (Paper 2) we analysed the effect of institutional factors (rule of law, IPR)

on offshore governance choices and firm performance regarding offshoring innovation

activities.

We used survey data from the ORN database, and focused on firms that offshored

product design, R&D, software development, and engineering services. Our results

partly support the results from previous studies which have stated that offshore

outsourcing is preferred when IPR protection in host countries is strong (Kshetri, 2007;

Oxley, 1999), but also showed something quite different. Kshetri (2007) stated that

firms often adopt captive mode in countries with weak legal systems, however our

regression results show that the quality of rule of law in host countries is positively

related to the probability of choosing captive mode. Further, researchers find that

strategic investment in property, for example machinery and brands, can be at risk in

environments where the rule of law is considered weak (Levie & Autio, 2011). Given

that substantial investments are typically required in captive mode, which in turn would

221

result in heavy financial losses if the operation fails, a weak legal protection system in

host countries could increase the risks firms face when opting for captive mode. This

can explain our results, and suggest that MNCs will be more committed to the

offshoring destination if the protection of legal system in the host country is strong. In

addition, a firm’s concerns about the IPR protection in host countries do not show

significant impact on the governance choices.

The effect of institutional factors and governance choices on achieving certain offshore

outcomes was also tested. Previous literature suggested that firms select their

governance modes based on their purpose of maximising their performance, and it is the

alignment between governance and the prediction of governance based on a relevant

conceptual framework (e.g., TCE, RBV) that affects performance (Shavers, 1998;

Brouthers, 2002). Scholars have stated that collaborations with suppliers via offshore

outsourcing can offer firms access to new resources (which include talent resources and

technological resources from suppliers in host countries), better focus on core

competencies by outsourcing peripheral business activities, as well as enhancing focal

firms’ flexibility (Bertrand, 2011; Kedia & Lahiri, 2007; Contractor, et al., 2010;

Javalgi, et al., 2009). Our results support these statements by showing that firms who

fail to adopt outsourcing are less likely to achieve the outcome of better focus on core

competencies, better access to personnel, improving organisational flexibility, and

increase firm’s overall competitiveness.

Our results also show that failure to select captive mode is positively related to the

probability of achieving the outcomes of improved organisational flexibility, increased

firm’s overall competitiveness, and increased productivity/efficiency. This could be

attributed to the fast and tremendous development of outsourcing industry, the

improved quality of service from the service providers may still deliver some

efficiencies and allow to achieve certain performance outcomes by selecting

outsourcing although the model predicted is to select captive mode (Lacity, et al., 2009;

Quinn, 2000). Thus, the results suggest that governance misfit does not always hurt

firm’s performance.

Barro (2000) identified a positive relationship between the economic performance and

quality of rule of law. Researchers argue that strategic innovation activities are still

being carried out in developed economies (Manning, et al., 2008; Doh, et al., 2009), and

offshoring innovation activities to such countries could help firms to utilise the

222

technological resources and strengthen their core competencies, which explains our

regression results that rule of law in host countries is positively related to the probability

of focusing on core competencies. Scholars have also stated that offshoring innovation

activities to emerging countries not only provides firms “round-the-clock” services to its

product development, customer services and opening new markets to firms, but it also

offers firms specific locational resources and enhanced innovation capabilities (Siems &

Ratner, 2003; Bryson, 2007; Chung & Alcácer, 2002). However, emerging countries

normally do not possess strong and complete legal systems, which could explain why

the quality of rule of law in host countries is negatively related to the probability of

increasing the firm’s overall competitiveness, improving service quality, accessing new

markets, and achieving breakthrough process improvement(s). In addition, we find that

IPR protection strength in host countries is negatively related to the probability of better

accessing qualified personnel. This could be because the weak IPR protection strength

in emerging countries is a big concern to many firms, but the availability of talent in

those countries is also an important factor that attracts firms to offshore innovation

activities there (Massini & Lewin, 2012; Bardhan & Jaffee, 2005). Although offshoring

innovation activities to countries with weak IPR protection will make firms face higher

risk of IP leakage, firms also gain the opportunities to learn about their competitors’

technologies in such countries (Aron & Singh, 2005). By offshoring non-core

innovation activities to countries with weak IPR protection but offering cheap labour

and great pool of talent, firms are better able to focus on core competencies. This could

explain why the quality of IPR protection in host countries is negatively related to

achieving the outcome of better focus on core competencies. However, whether the IPR

regime of a host country affects firm’s R&D strategies (e.g., what type of technologies

are to be offshored) in the given country could not be answered from the results

presented in this chapter. This motivated us to test such relationships, the results of

which are presented in Chapter 5 (Paper 3).

6.1.3 Summary of findings: Why do multinational firms locate R&D to China? An

analysis of the determinants of location strategies

In Chapter 5, we focused on 79 MNCs in the pharmaceutical and computer and

electronics industries that have R&D labs in China. Following the methods developed

223

by Patel and Vega, we used patent data extracted from PATSTAT to calculate the share

of each location strategy that these firms adopted in a given year.

Our descriptive results partly support findings from previous studies, which have shown

that technology augmenting is the primary motive driving MNCs to go abroad, and that

pharmaceutical firms are driven more by technology augmenting than electronics firms.

(Laurens, et al., 2015; Le Bas & Sierra, 2002; Patel & Vega, 1999). However, our

results also differ from previous studies by showing that technology building is a key

strategy for firms to choose China (especially for pharmaceutical firms), and that the

importance of market seeking and technology exploiting is gradually increasing. The

results indicate that technology seeking (technology augmenting and technology

building) constitutes a big part of motives for MNCs offshoring R&D activities to

China. Although China traditionally does not possess strong technological competencies

in pharma, it is still an attractive destination for pharma firms from countries which do

not have these capabilities (e.g., semiconductors, nanotechnology). As for computer and

electronics firms, the increasing share of technology exploiting strategy indicate that as

China is gradually obtaining technology advantages in computer and electronics field,

firms are more willing to locate the technologies that firm’s home country has a relative

specialisation in (technology augmenting and technology exploiting became the two

dominant strategies since 2003) there.

We further analyse whether the institutions (IPR and rule of law) affect the choice of

these location strategies, and our results show that the IPR protection strength of China

is positively related to the share of market seeking and technology exploiting strategies.

This is an indication that when firms are planning to conduct R&D activities in areas in

which China is not specialised, they are more likely to offshore such activities if the IPR

protection regime in China is strong. We find that IPR protection regime in a firm’s

home country is negatively related to the share of technology exploiting strategy, which

indicates that when IPR protection strength in a firm’s home country is strong, a firm

will be more reluctant to offshore technologies with a relative technological advantage

in the home country. Our findings suggest that firms are more concerned about IPR

protection in home and host countries when using technology exploiting strategy, i.e.

locating technologies in which the home country has a relative technological advantage

but the host country does not, since this strategy may lead to higher risk of IP leakage.

The regression results also show that both the IPR protection strength of China and

224

firm’s home country, and the quality of rule of law in China, is negatively related to the

share of technology building strategy. This may suggest that technology building can be

adopted as an explorative R&D strategy to fully utilise the resources in countries with

weak legal systems.

In summary, this thesis analyses the influence that institutional factors (IPR and rule of

law) have on offshoring decisions utilising varied data sources and research methods.

First, by analysing the provisions of IP laws and IP related data published by

governments, Chapter 3 (Paper 1) indicates that the IPR protection regime in China is

improving and also suggests coevolution of innovation activities and IP system

development. Second, in Chapter 4 (Paper 2), we find that the quality of host country’s

legal system can strengthen firm’s commitment to the country, and firms will be more

willing to outsource innovation activities to a country with better IPR protection. The

results also show that institutional factors can affect achieving business outcomes

offshore, in particular, that accessing to qualified personnel is more likely to be

achieved in a country with weaker IPR protection, and focussing on core competencies

is more likely to be achieved in a country with higher quality of rule of law but weaker

IPR protection. We used survey data in this chapter, which reflects the respondents’

perception of importance of factors regarding governance choices, and it covers firms

that offshored innovation activities to different countries. Although efforts have been

made in the ORN to identify the most appropriate person to respond, limitations still

exist since a respondent’s subjective opinion may not be able to reflect fully the

decision making process for offshoring in firms, especially for implementations further

back in time, unless the respondent was directly involved in the decision. Unfortunately,

it is not possible to control for this potential bias. Furthermore, we are unable to identify

the specific R&D strategies firms adopted by using these data. For example, many

pharmaceutical firms have established R&D labs in China, but the R&D activities

conducted in the lab may be less central to the firm’s strategy than the ones conducted

in the firm’s home country or other developed countries. Therefore, using patent data in

Chapter 5 (Paper 3) to analyse the location strategies from the technology field aspect,

can overcome some of these limitations and complement the findings in Chapter 4. In

Chapter 5, we find that technology seeking (technology augmenting and technology

building) strategies play an important role in driving MNCs to locate R&D activities in

225

China, that technology augmenting strategy will be preferred if the quality of rule of law

in China is improving, and that the share of technology exploiting strategy will be

higher if the IPR protection in China is better. The results also suggest that MNCs may

still choose a country with weak legal system to conduct explorative research to

supplement the technologies which are not available at home.

6.2 Contributions and implications

This PhD thesis uses different data sources and both qualitative and quantitative

research methods to comprehensively test the relationships between institutional factors

and different aspects of offshoring innovation activities. Its theoretical and empirical

contributions are five-fold.

First, instead of approaching the IPR regime in China based on previous economic and

business research, news, other government’s reports, we developed a novel five-

dimension assessment scheme (the scope of protection, the duration of protection and

clarity of procedural provisions, enforcement mechanisms, protection strength of IPR,

and the restrictions on IPR) based on the work of Ginarte and Park (1997), which

provides a clear guidance when evaluating the quality of IP law revisions. Second, since

the IPR regime in China has been an important topic in previous studies, this research

discusses systematically for the first time the changes of IP laws and enforcement over a

period of 20 years, using the five-dimensional assessment scheme, and in doing so, we

provide a comprehensive understanding of the Chinese IP laws and practice. Our results

contribute to the existing literature by showing that the IPR protection China is

improving, and confirmed that the TRIPS agreement have provided a solid foundation

for China to improve its IP system.

Third, previous studies have stated that both captive offshoring and offshore

outsourcing may increase the risk of IP losses, which may be caused by weak IPR

protection in the host country (Razzaque & Sheng, 1998; Griffith, et al., 2009). This

research contributes to the governance mode choices literature and the roles that

institutional factors play when offshoring, and have extended previous work regarding

the relationship between governance choices and firm performance by focusing on

offshoring innovation. Our study also find that the institutions of host countries and

governance mode misalignment have an effect on the achievement of certain offshore

226

outcomes (i.e., focus on core competencies, access to qualified personnel, improve

organisational flexibility, increase in firm’s overall competitiveness, increase

productivity/efficiency, improve service quality, better access to new markets, and

breakthrough process improvement(s)), which was not systematically analysed in

previous studies.

Fourth, previous research regarding location strategies only focused on a short period of

time, while this study has analysed the evolution of the location strategies MNCs

adopted in managing R&D activities in China. Thus, we believe that this paper

contributes in a novel way to develop a fuller and deeper understanding of how MNCs

manage their R&D activities in China. Finally, we have extended previous works by not

only identifying the dominant location strategies (Patel & Vega, 1999; Le Bas & Sierra,

2002; Laurens, et al., 2015), but also tested the influence of institutional factors (i.e. IPR

protection strength of home and host countries, quality of rule of law, and institutional

distance) on the choices of these location strategies.

The thesis has three major managerial implications. First, for MNCs which are

concerned about the IPR regime in China, this study provides a comprehensive analysis

of Chinese IP system and its development, which could help MNCs to make decisions

that may be affected by the IPR protection. Second, this study has identified that

relationships between governance choices and institutions do exist. We also analysed

the effect that institutions and governance choices have on achieving offshore outcomes.

MNCs can learn from this thesis about the roles that institutional factors play when

making decisions regarding governance choices. They can also learn how certain types

of outcomes via offshoring are related to the different governance modes they can

choose and what type of institutional environment they need to consider, for example,

choosing outsourcing in countries with good IPR protection, or, if a firm wants to

improve its core competencies, choosing a country with a more robust legal system.

Third, we find that institutional factors (IPR and rule of law) affect the choice of

location strategies, therefore, this thesis can provide guidance to decision makers in

corporations regarding what needs to be considered when making decisions regarding

offshoring R&D activities to China, and how to organise these R&D activities. For

example, firms could adopt technology exploring type of strategies to utilise the

technology advantages in host countries which have weak IPR protection.

227

From the government policy makers’ perspective, this research provides guidance on

the following aspects: first, the results in Chapter 4 show that the quality of rule of law

in host countries is positively related to the choice of captive mode. Therefore, a country

that wishes to strengthen foreign MNCs’ commitment by establishing wholly-owned

subsidiaries or to attract more FDI, the policy makers should improve its legal system

by revising its laws and strengthening the law enforcement. Second, in Chapter 4 we

find that if the IPR protection in a host country is stronger, the probability of choosing

outsourcing mode will be higher. Studies have shown that offshore outsourcing can also

bring benefits to local firms in host countries, since it offers greater learning

opportunities for suppliers to acquire advanced technology, knowledge of international

markets, new product development skills, R&D skills and so on, which can provide

them with opportunities to get closer to the technological frontier (Ernst, 2000; Li, et al.,

2010). If policy makers want to improve the innovation performance of indigenous

firms by attracting MNCs to outsource more advanced innovation activities and to

stimulate the development and prosperity of local service providers, they should

strengthen the IPR protection. The results in Chapter 5 also show that the IPR protection

in China is positively related to the share of technology exploiting strategy which

represents that the technology offshored is the technologies MNCs have specialisation

in home country, but China is comparatively weak. Previous studies have stated that

R&D activities conducted by MNCs in host country positively influences the innovation

performance of local firms (Liu & Buck, 2007). Therefore, if emerging countries like

China want local firms to access to MNCs’ technologies, or if they want to attract

technologies in industries in which host country is comparatively weak, the quality of

IPR protection regime in host country should be improved to provide a reliable

institutional environment.

6.3 Limitations and future research

Despite the several contributions of this thesis, limitations also exist in this research that

could be addressed in future research.

First, two out of the three papers in this thesis are about China. Although the discussion

presented in Section 2.1 justified our choice of focusing on China, it is a country with a

big and heterogeneous landscape, large population size, and a unique political system.

228

Whether the findings concerning China are applicable to other emerging countries is not

clear. Future research could include other host countries which share different country

characteristics.

Second, the survey data used in Chapter 4 covers a wide range of firms with different

sizes, that offshored to varied locations, and who operates in different industries. It also

contains comprehensive information of respondent’s perception of the importance of

factors which may affect their offshoring decisions. However, the survey was no longer

conducted after 2011, and firm’s perception regarding offshoring may have changed

since then. In order to better contribute to the literature and reflect the current offshoring

situation, future research should be carried out based on updated survey data. Since this

database mainly aims to identify the factors that affect offshoring decisions, some firm

information is not available (for example, R&D spending). Future research can combine

the survey data with other databases to enrich our understanding of the sample firms.

Furthermore, the empirical analysis treats governance choices as dichotomous, but in

practice firms may select varied governance solutions to deal with different tasks and

engage in collaborations or joint ventures so that governance choices in reality appear as

a spectrum in between the two extremes considered in this study. However, in the ORN

database there are only few cases of such intermediate governance modes which would

not have allowed for robust analyses. Therefore, this is a data-driven limitation which

we could not address in the thesis. In-depth interviews could be conducted in future

research to test the validity of our findings, filling the gaps which cannot be addressed

in empirical analysis, and can also provide us a deeper understanding of their choices,

and how they manage their business activities.

Third, the findings regarding location strategies are based on MNCs in the computer

and electronics industry and the pharmaceutical industry, which are both knowledge-

intensive industries with specific characteristics. Although we drew conclusions which

are restricted to these industries, in order to test the validity of our findings across

industry more broadly, future studies could include more industries establishing &D

labs in other countries.

Fourth, patent data is widely used as an indicator of innovation output. However, we

note the limitations of patent data as an indicator for innovation. For example, patenting

is not the only way to protect inventions, and not all innovations are patentable since

patenting requires meeting the patentability criteria according to patent law (Hall, et al.,

229

2001; Braun, et al., 2011; Basberg, 1987). Case studies could be adopted in future

research to test our findings.

Finally, this thesis analysed the factors that affect governance choices and focused on

firms that have R&D centres established in China. However, these firms may also

cooperate with local suppliers while having established R&D labs. Since the patent data

cannot tell whether a supplier contributed to a patent, future research could adopt

qualitative research methods to further analyse a firm’s R&D strategies. For example,

interviews can be conducted with firms from both demand and supply side, identifying

what type of R&D activities firm choose to keep in-house, and what type of R&D

activities they choose to outsource.

230

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