How to take advantage of China knowledge base? A CEIBS-SKEMA joint research project Barcelona, November 2013. 02/12/2013 1
A changing landscape A new world order in innovation is taking hold, one in which rapidly developing economies (RDEs), led by China, India, and Brazil, will increasingly assume more prominent positions, while the United States and other mature economies continue to play major roles but gradually become less dominant. (The Boston Consulting Group, 2011, Innovation 2010 A Return to Prominence and the Emergence of a New World Order). 02/12/2013 2
Our proposition: Drivers for foreign R&D centers in China have changed Contribution to value 1 COST DRIVEN = outsource or support for local production 2 MARKET DRIVEN = adaptation of products or processes developed outside China or full local development (China for China) => revised products 3 KNOWLEDGE DRIVEN = access to the knowledge of the national & local systems of innovation => new products => low-cost replicated products Past strategies Actual strategies Future strategies 02/12/2013 3
Part 1 Mapping the Chinese National System of Innovation 02/12/2013 4
Public research institutes the locomotive of national Innovation + research institutes managed by ministries Examples: - SIOC: Shanghai Institute of Organic Chemistry - SIBS: Shanghai Institute of Biological Science - SARI: Shanghai Advanced Research Institute, etc. 02/12/2013 5
Public universities Research universities The best 10 Program 211 (1995) = focus on 100 A total of 2.183 universities (in 2011) Teaching universities 02/12/2013 6
The top 10 universities (Hefei) Source: http://edu.sina.com.cn/focus/utop.html 02/12/2013 7
Scientific articles from China Chinese Institute for Science and Technology Since 2007, China is 2d rank world-wide with 218.000 scientific articles Thomson Reuters 1998: 20.000 scientific articles 2006: 83.000 (outpace UK, Germany, Japan, France) 2009: 120.000 (USA = 350.000) 02/12/2013 8
+100 science and technology parks Beijing Shanghai & Yangzi delta Scientific and technology parks are concentrated in three regions, and more generally, on the coastal area. Guangzhou & Shenzhen 02/12/2013 9
More and more Chinese companies investing in R&D 02/12/2013 10
More and more foreign companies starting R&D centers in China Information technologies Pharmaceutical industry 02/12/2013 11
More and more foreign companies starting R&D centers in China Chemical industry Electrical ind.& electronic Others: food, car, cosmetic, etc. 02/12/2013 12
Technological intensity: Long-term trends for leading countries Sources: OECD and stats.gov.cn R&D spending / GDP 4,00 3,50 3,00 2,50 2,00 1,50 1,00 0,50 USA Japan Germany United Kingdom France Italy South Korea China Brazil 0,00 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 India 02/12/2013 13
China s surge in patent activity 02/12/2013 14
China > USA In 2011, according to the World Intellectual Property Organization (WIPO), China surpassed the USA for patent applications: 526.000 were filed in China as 504.000 were filed in the USA and 343.000 in Japan. There are nevertheless several restraints. One thing is volume, quality is quite another. This is domestic patenting; in 2010, China filed only 6% of the patent applications in the international system. And, it is alleged that much of the domestic patenting is not patenting of original innovations, but utility patents for an application, or patents of existing foreign innovations, which are intended to provide a basis for extortion with a foreign company to buy the patent right. 02/12/2013 15
Chinese NSI in brief 02/12/2013 16
Part 2 From cost-driven R&D to market-driven R&D to knowledge-driven R&D 02/12/2013 17
Research question: How to foster the innovation output of MNCs foreign R&D units? Innovation output = f ( location, interactions with the milieu, people management, organization, knowledge management, etc. ) 02/12/2013 18
What do we mean by R&D? Company Research and development Universities and Public Research Institutes Fund. Res. Applied research Primary Development Development End of Development Factory Papers & Patents Patents & Prototypes Patents Products & processes 02/12/2013 19
Case studies: Nb. of companies visited 12 industries 50 companies 71 interviews Aeronautic 2 2 Electrical engineering 4 6 Electronic 2 6 Car industry 7 9 Chemical industry 12 18 Energy 1 1 Food Industry 2 2 Mechanical engineering 2 2 Construction materials 2 4 Pharmacy & Cosmetics 9 10 Information Technologies 5 9 Semiconductor industry 2 2 02/12/2013 20
Sample Country # French 15 Germany 7 The Netherlands 6 The USA 9 Switzerland 3 United Kingdom 1 Sweden 2 Finland 1 Denmark 1 Japan 2 South Korea 2 Taiwan 1 02/12/2013 21
Two types of results Independent of the context: A. The older the R&D unit, the larger the scope of activities. B. The number of WOFEs outpaces the number of JVs. C. The older the R&D unit, the less the percentage of expatriates. Strongly dependent on the driver for R&D: 1. Cost-driven 2. Market-driven 3. Knowledge-driven 02/12/2013 22
Universities and Public Research Institutes Fund. Res. Applied research Primary Development Development End of Development Factory Cost driven Market driven Knowledge driven (4 exceptions / 40 companies = BM, F, MA, and MS) Result (A): The older the R&D unit, the larger the scope of activities. 02/12/2013 23
Predominantly Wofe(Wholly Owned Foreign Enterprise) 3 x JVs 4 x Take-over of an existing Chinese company Contracts with Chinese partners (pharma) Result (B): The number of WOFEs outpaces the number of JVs 02/12/2013 24
35,00 30,00 (data available for 30 companies / 50) F Too much? Pourcentage d'expatriés dans l'effectif 25,00 20,00 15,00 10,00 F: French, G: German F G Main Série1path 5,00 G 0,00 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 G F G G F F F F F Année de création du laboratoire G F F F Too less? Result (C): The older the R&D unit, the less the proportion of expatriates. 02/12/2013 25
Proposition: Cost > Market > Knowledge How to foster innovation output of foreign R&D labs depends on the driver Innovation output = f ( location, interactions with the milieu, people management, knowledge management, etc. ) Driver 02/12/2013 26
1. Cost-driven: End of Development Few or no change to the product or process Done in China Universities and Public Research Fund. Res. Applied research Development Institutes Primary Development End of Development Chinese Factory K Activities carried in Europe, the USA, Japan, South Korea, etc. Other Asian countries Examples Contribution to a global project:outsourcing of testing Match with manufacturing:small domestic appliances 02/12/2013 27
Key Success Factors / cost driven Match with suppliers for adaptation to local raw materials and local conditions (temperature, humidity, etc.) Match with regulatory bodies for compliance Need for high degree of connection between R&D and production Location: close to Chinese factories to provide technical assistance or in a S&T park which offers cost advantage for space and/or tax abatement People: Local Bsand Ms Most of the K comes from the HQ in developed countries, few K is developed in China Patent / processes 02/12/2013 28
Universities and Public Research Fund. Res. Applied research 2. Marketing-Driven: Focus on Development Done in China Development Institutes Primary Development End of Development K Reverse Innovation Chinese Factory Done in Europe, the USA, Japan, South Korea, etc. Drivers: local demand and regulations K Other Asian countries Products which need a local adaptation: Cosmetics, Car industry, Electrical engineering, Mechanical Engineering, Localized electronic products, Agro food Production processeswhich has to be adapted: Construction materials, Basic chemicals, Pharma clinical trials 02/12/2013 29
Wrinkles or spots? 02/12/2013 30
From a two-parts body to a threeparts body vehicle: Peugeot 308 02/12/2013 31
Car industry: Stretched models The Chinese 5-Series LWB (long wheel base) model is built at BMW s plant in Shenyang. In the land of Mao, 90% of the Benz executive sedan trade comprise long wheel base cars. 02/12/2013 32
General Electric locomotive for Tibet Based on a design developed outside China, adaptation of diesel engines 02/12/2013 33
Construction materials Available raw materials Temperature Moisture >>> need to adapt products and processes 02/12/2013 34
Bayer Material Science Showroom 02/12/2013 35
Key Success Factors / Market-driven R&D China for China Cannot be done remotely: Need to match with local demand Analyze consumers insights Co-create with customers (B to B) Make the market recognize the offer Match with regulatory bodies to fit with local standards and regulations Hire R&D managers with marketing abilities Report knowledge developed locally to HQ No need to be based in a S&T park, localize the center close to sales people 02/12/2013 36
3. Knowledge Driven: Development + Applied R. + Fundamental R. K K Done in China Universities and Public Research Institutes Fund. Res. HQ Applied research HQ Primary Development Development End of Development Chinese Factory Local startups K K subcontra ctors K The world Global business (same product all over the world, no need for local adaptation): Software, Energy, Pharmaceutical companies for new drugs, Specialized chemicals, Global electronic products, Semiconductor industry 02/12/2013 37
Example: A petro-chemical company Target: to gain access to Chinese research knowledge and infrastructure on the conversion of coal into synthesis gas Formation of 50-50 JV with a Chinese engineering company well embedded into the Chinese NSI to develop the next generation of syngas production technology Joint project with a Chinese partner from development to deployment 02/12/2013 38
Example : Microsoft, early investment in research Started research (1999) before the Product Development activity (2006) 2013: 300 persons / Research, 3.000 / Product Development Intent for R: establish leading connections with Chinese NSI The 30 best universities: for hiring large numbers of smart talents The Chinese public research centers: for joint labs The start-ups: The Cloud integrator program 02/12/2013 39
Example: The case of the pharmaceutical industry Chinese stake-holders: catching up with the West CAS research institutes Independent research institutes affiliated to hospitals Bio-tech companies Contract Research Organizations (CROs) Context Public research on life sciences in China has not produced tangible outputs Business is highly fragmented (+ 3.000 domestic companies + 40 MNCs) Two activities Tests on human beings of drugs developed and already approved (by the FDA in the USA, the EMEA in Europe, etc.). Foreign MNCs look for China approval (CFDA) Research on new drugs Two strategies for research Implementation of a research laboratory Implementation of a team having the responsibility to connect HQ research with Chinese public research teams 02/12/2013 40
Key Success Factors / Knowledge driven R&D China for the world Need to gain the support of HQ Foster collaboration with public universities and public research institutes Funding of initial research Outsourcing R&D Collaboration People: recruit good scientists (higher proportion of PhD than other modes and more returnees) Location: should facilitate access to local systems of innovation (LSI) and/or national system of innovation (NSI) Active patenting Take-over is a possible option Locally developed K transferred to other company locations (networking) for worldwide use 02/12/2013 41
Another China 02/12/2013 42
Questions & Answers 02/12/2013 43