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Understanding R&D Transaction Choices by MNCs in China: An Empirical Analysis

This research paper investigates the paradoxical nature of R&D transaction choices made by multinational corporations in Beijing. It examines the factors influencing the decision between internalization and outsourcing of R&D contracts, using Williamson's three-dimensional hypothesis framework. The study reveals that uncertainty and assets specificity significantly impact the mode of outsourcing-oriented transactions. Recommendations for local governments and MNCs are provided to enhance research and development activities. Future work includes refining the model with additional variables.

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Understanding R&D Transaction Choices by MNCs in China: An Empirical Analysis

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  1. R&D transaction choices by MNCs in China: empirical analysis based on contracts Zheng Feihu Shi xiaoxiao

  2. Background • China’s potential for innovation; • China attracts foreign R&D since 1995; • Beijing offers location advantages for research-intensive R&D units since 1999.

  3. A “Paradox” • A “paradox” in the statistic about the MNCs’ R&D contract transactions in Beijing during 2001-2006 • “Paradox”——only 18.15% of the deals is inside the MNCs under the same ownership, while most of the contracts are executed between the parties not having close ownership relationship.

  4. For the R&D contractstransaction demanding mutual trust and large deal of proprietary assets inputs, why not choosing internalization but putting it to outside market ( here in after called outsourcing) ?

  5. Aims of this paper • what’s the cause of the so-called “paradox” in R&D contract transaction in Beijing? • what factors determine the choice of R&D contract outsourcing in Beijing using the framework of Williamson’s ” three-dimensional hypothesis”?

  6. Descriptive analysis • R&D activities in Beijing are in superior levels, and the spillover effect to abroad is obvious. • The internalization of R&D transaction in Beijing is not obvious, but the outsourcing of R&D contracts is prominent.

  7. Data and Research Method • Dependent variable—— Outsourcing is coded as “1” and internalization-oriented activities Is coded as “0” • Independent variables—— We design the factors under the framework of ” three-dimensional hypothesis”，all factors are categorized into three dimentions.

  8. transaction frequency ( the variable includes： the average dealing amounts of R&D in the same district in half a year)

  9. Uncertainty (the Proxy variables are from the outside R&D clustering environment, including： average salary、 ratio of Manufactory industry、 Intellectual Property protection、 Financial disbursement means)

  10. Assets specificity ( that’s up to MNCs’ features of ownership, the proxy variables include:) contracts time-span、 contracts types 、 controlling interests of the R&D units.

  11. control variables——dummy variable (IND) to control for industry differences. those fields with human-orientation(mainly in fields of software and network development) is coded as “1”, other fields with asset-orientation is coded as “0”.

  12. Table 7. dummy variable for IND

  13. Methodology P(ifos)=β1 IND+β2 otheramount+β3 avsalary+β4 secper+β5 intelpro+β6 method+β7 period+β8 contype1+β9 selltype3+β10 secsalary+β11 perfield+ μ

  14. Table 9. Logistic Model Estimates for Formation of outsourcing-oriented R&D transaction Notes: ( *,p<10%; **, p<5%; ***, p<1%)

  15. Results and Discussions • the findings suggest that the two dimensions of Uncertainty and Assets Specificity can be used to explained MNCs’ R&D transaction in Beijing. • But the dimension-transaction frequency, because of the unfavorable proxy variable, still can’t be tested.

  16. Results and Discussions • the variables representing Uncertainty such as average salary level, IPRP, financial reimbursement means; • and the variables representing Assets Specificity such as contract time-span, contract types, and controlling interests in seller’s R&D units are significantly related to the mode of outsourcing-oriented transaction.

  17. Solving the “Paradox” • the combination of two conditions provides a good explanation for the above so-called “Paradox” ——necessary condition：the maturity of outside supplying resource； ——adequate condition：outsourcing businessnot conflicting with the ownership of the MNCs

  18. Some suggestions • For the local government, focusing on developing the conditions necessary to maintain a thriving localized research and development community • For the MNCs, enhance the synergy between their international oriented R&D and the local oriented R&D activity.

  19. Limitation and future work • Find a suitable proxy variable for the transaction frequency • Better our model with new factors such as the different contract features(international oriented/host oriented) and culture distance.

  20. You are Welcome!

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