High-Tech Industries and R&D in China – An Introductory Note 

The development of high technology in China took off in 1988 when considerable synergy was created between the development of microelectronics, computing, integration of optics, bio-engineering, aerospace technology, laser technology, medicine and marine engineering. . It is said that the rise of India and China as centers of innovation will radically change the technology industry existing today that is based mainly in western countries. 

The Chinese government has adopted various policies to encourage foreign investment in high-tech sector. The huge population and scientific manpower gives China the ability to keep doing the low-tech work and at the same time develop more high-tech activities. The Chinese government is continuing to encourage technology-intensive industries in East China by leveraging this region’s existing ability to attract foreign investment, it is also adopting measures to encourage foreign investment in central and west China by giving some extra concessions like relaxed rules for bank loans, tax concessions, etc. Foreign R&D institutions are permitted to undertake various forms of collaboration with research institutes, universities, colleges, etc. Apart from R&D centers, the Chinese government is now encouraging foreign companies to establish operational headquarters, logistic centers, etc. with the aim of absorbing MNC’s management experience. However, foreign companies still face entry barriers in terms of restrictions on capitalization and personnel which includes; clauses like, the persons directly involved in R&D activity must account for at least 80 per cent of the R&D center’s total staff etc. 

Chinese government initiated reform in science and technology sector in 1985, which includes, autonomy to research institutes, allowing employees to move from one institution to another, establishment of national award etc. China has also allowed transformation of science and technology research institutes into business enterprises. In 2001, spending on R&D in China increased by 16.4 per cent. As a percentage of GDP, R&D spending stood at 1.1 per cent. Due to the reforms, China now has become successful in commercialization of research results. In 2001, China ranked twelfth in the world in terms of the number of patents applied for. However, due to streamlining of operations of R&D institutes, the development of new areas of work, etc., the number of technical personnel working for R&D institutes has continued to fall since 1995. 

The regional disparity in China indicates that, seven regions account for 70.6 per cent of China’s total R&D resources and 53 per cent of its GDP. There is a heavy concentration of R&D resources in the Beijing-Tianjin region. The ratio of R&D spending to GDP provides a good measure of the level of progress in terms of economic and technological development .To facilitate the commercialization of R&D results, China has made extensive use of the industrial parks concept which is to provide infrastructure, tax breaks and other incentives to stimulate development. But even after more than a decade of development significant disparities have developed between the high-tech zones and in some zones there been no real development. 

China high-tech industries lack intellectual property rights and competitive brands. The development of the high-tech sector in China has been heavily dependent on the introduction of technology from overseas. The R&D facilities established by MNCs often outsource a substantial part of their research work to local research institutes, thereby helping to raise the overall standard of R&D work in the region. However, China’s innovation capability still are unsatisfactory due to the factors like low funding, restrictions on scientists to engage in commercial activity, legal system which does not give sufficient protection to intellectual property, etc. In the last few years, with the implementation of the government’s policy of ‘using technology to stimulate trade’, the value of China’s high-tech imports and exports has grown rapidly. High-tech products have thus played an important role in helping China to maintain high export growth. But it will take some more time for China’s high-tech companies to strengthen their technology innovation and international competitiveness. At the same time, China’s stable social environment and cheap labor have proved very effective in attracting foreign investment.  

The high-tech exports of foreign invested companies have grown; the share of state-owned enterprises of the same has come down. The Chinese government has formulated regulations to make technology transfer compulsory for multinationals investing in China. The Peoples Republic of China’s Law governing the operations of foreign-invested enterprises stipulated that when a foreign-invested enterprise is established in China, it must adopt advanced technology and equipment, or else the whole of its output must be exported. Furthermore, foreign partner must transfer advanced technology to the joint venture and this is one of the criteria for the granting of approval for such ventures by the Chinese government. 

The US companies account for the largest share of MNCs that have set up R&D facilities in China, with Europe and Japan having the next largest shares. The need to maintain the secrecy of one’s own technology leads MNCs investing in R&D in China to want to keep control over the operation; the more advanced the technology, the more likely it is that the R&D facility will be established as a wholly-owned subsidiary. Even though China is now a signatory to several of international IPR related treaties, still the level of protection given to IPR in China is significantly lower than in the advanced countries and there is incomplete implementation of Chinese government policy to encourage R&D activity. 

 There is a considerable disparity between the developments of technology markets in different regions of China. The development of technology market has been fastest in those regions with strong R&D capabilities, a high level of foreign investment, a highly developed hi-tech sector or a high level of defense related R&D activity. China now has more than 250 venture capital institutions. Even though initially, venture capital funds were almost run by state-owned enterprises, today funding provided by non-government sources accounts for around 50 per cent of all venture capital funding. Venture capital sector has made a significant contribution towards the commercialization of research results and thus played an important role in growth of China’s high-tech sector. However, venture capital activity suffers from various problems like, lack of exit strategy, poor legal framework, shortage of fund managers, etc. 

The distribution of China’s private enterprises among industries is becoming less skewed, their average capitalization is rising and the problem of tax evasion is less serious. Management costs remain high and technology content of private enterprises` products is too low. However, private enterprises in the hi-tech sector are in a healthier condition than their counterparts in other sectors; there enterprises are now making a very significant contribution to China’s economic development.

Sourced from: Chinese Science and Technology Industrial Parks, by Chien-Hsun Chen and Hui-Tzu Shih. Aldershot. Ashgate, 2003.