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

1. Catching up from above -the development of Chinese R&D based competitiveness Six countries programme, Helsinki 17-18/6 2004 Vicky Long & Staffan Laestadius

2. Our message in short • Chinese firms rapidly develop competitiveness in the high (R&D intensive) end of ICT industry in general and within telecommunication in particular • It challenges the dominant view on how international firms localize knowledge intensive activitites within a globalized economy. • This is a preliminary report from the beginning of a research project on Chinese telecom strategies. In addition to the literature and statistics studied it is based on interviews with Chinese ICT actors.

3. The context: globalization! • Castells (1996) and the network economy • A reminder: • Product cycle discussion - 60s (Vernon) • The international firm discussion - 70s (Hymer) • The international sourcing discussion - 70s (Fröbel) • The Asian Tigers - 60-70s • Globalized communication systems

4. The catching up phenomenon • Europe on China - 15th century • America on Europe - 19th century • Japan on America/Europe - 20th century • First tier Asian Tigers • Second tier Asian Tigers • Who´s next?

5. The catching up process • Gerschenkron (1962) • Flying geese or leapfrogging • “Soft” leapfrogging - “real” leapfrogging! • Strategies by gvts. - and by intl. firms!! • Krugman (1994) and the “China syndrom”: quantitative or qualitative growth!

6. China - the figures! • Trade: 92/02 growth with 380% to global rank 4 • Manufacturing content in export: higher than most industrialized countries • ICT export: same as Japan and EU • ICT import: world top group • Telecom market: biggest size & growth in the world! • FDI: highest in the world (almost)! • Chinese firms are now going abroad

7. The consolidation of global business - the big business revolution • The merger boom (M&A) • The importance of the logo • The importance of the strategic knowledge • The competition along the value chain • The global sourcing of activities • Producing high-tech with no profit? • Will Chinese firms break through?

8. The challenge • Competition from Chinese actors directly in the high end and in industrialized countries • Telecommunication - a chance for real leapfrogging for China? • Competition on systems and technologies - in addition to design and interface - i.e. the high end of the R&D chain. • Next follows the preliminary results from a massive set of interviews with Chinese actors.

9. Interviewed organizations Pearl River Delta(Jun, 2003) 8 firms, 2 government bureaus 1 high-tech park and 1 university Yangze River Delta(Jul, 2003) 5 firms Bohai Rim region Frist trip (Aug,2003) 10 firms, 2 government authorities 1 high-tech park, 1 university Second trip(Jan,2004) 4 firms and 1 development zone 27 ICT firms 4 Government authorities 2 high-tech parks 1 EDZs 2 Universities

10. Interviews in China Interviews in China China tour map

11. Tranditional Division of Labour • “Asset-exploiting R&D” or “home-based exploiting (HBE)” • “Home-based augmenting (HBA)” remains concentrated in the developed economies ( c. f. Dunning, 2000; Criscuolo & Narula & Verspagen, 2001)

12. Identified two directions of international R&D flows(conjectures) • Many Western incumbent ICT firms move HBA/advanced R&D activities to China and/or in China based firms • Chinese firms, after having successfully encroached market shares from foreign vendors at home and/or using the home market as an important “cash cow”, aggressively build up R&D labs in the advanced economies like USA and Sweden.

13. Western firm’s R&D labs in China Three stages of high-tech MNC’ R&D investment: • Exploratory and strategic partnership stage (early - mid of 1990s): JV-based; “Show” • Expansion of R&D investment stage (mid - late 1990s): intensive cooperation; exploring the “West” • Consolidation of R&D stage (late 1990s - present): China’s accession to WTO; Domestic development; consolidated, strategic FDI approach Source: Henry L. Stimson center (Walsh K, 2003)

14. MNCs’ R&D labs • Developed regions (USA, Europe) • NIEs (e.g. Acer, Kinpo Electronics, Viatech, Samsung, LG)

15. Two mechanisms favor this ICT R&D movement (conjectures): • Development of local conditions • The mobility of ICT technologies and industries Rivalry, Matured Partners, Market Size (c.f.Walsh, 2003, Chen 2004)

16. Different structure and focus on R&D • Spillovers (both ways) • China - a sophisticated market? • Social embeddedness • Implication - Learning

17. Chinese establishment of overseas research labs “Walks on two legs” Chinese firms/enterprises (e.g. TD-SCDMA ) Leading indigenous Telecom & Datacom vendors Overseas labs A Emerging Innovation Forces & Drives of Setting up Overseas Labs

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

19. Drivers • Technology spillovers • Semantic and contextual limitations of Absorptive capacity • Center of excellence • Global sourcing

20. The Activities of Overseas Labs - Four Steps and Onwards (observations) • BI unit • Cautious (budgeted) expansion & investigation • A clear technological element/focus formed • Convergence with local market needs (Contrary to its guerilla strategy--- ”besieging and encircling from village to city”??? )

21. Scenario? • Hurdles and Limitations Country, industry, corporate-specific hurdles • The leapfrogging possibility?

22. Implications • Challenge to conventional wisdom on globalization processes? High-tech & low tech concentration; Input-driven growth; Inward-orientation vs. outward-orientation; • A global convergence of knowledge formation ?