Tuesday, February 26, 2008
A REVIEW Focus On Innovation: Can Asians Innovate? --- Engineers to Researchers
By Douglas Fuller and Eric Thun
6 July 2007
Far Eastern Economic Review
(c) 2007 Dow Jones & Company, Inc.
Is China a paper tiger? A number of doomsayers have predicted that the end is near for China, with scenarios ranging from a simple halt in the country's rapid growth to a complete collapse of the Chinese state and economy. In many cases, the implicit points of reference for these doomsday predictions are China's neighbors. Whereas planners in Seoul, Tokyo and Taipei successfully built domestic firms to compete in international markets, the pessimists look at China's extensive reliance on foreign direct investment and see nothing but weakness.
The China boosters, on the other hand, look at the raw data of China's growth and conclude that China is on the fast track to becoming an economic superpower, with world class companies that combine cutting edge technology with low cost labor. These optimists look to Chinese companies, such as Lenovo and Shanghai Auto, and see the world's next Samsung and Toyota, but on an unparalleled scale -- Japan Inc. times ten. While there is certainly reason for optimism, this view fails to take into account the fundamental weaknesses of China's national champions. Simply put, many of these firms lack independent technological capabilities and destroy more value than they create.
The two viewpoints assume that successful developers will cultivate indigenous enterprises with independent technological capabilities like past Asian economic miracles. What the accounts overlook, however, is that the mechanics of the global economy have changed. Although FDI in itself is nothing new, what is new is the degree to which production chains have become globalized. China is rapidly developing in an era with new opportunities and constraints, and it should not be judged by the standards of the past.
Far from being a source of weakness, China's global linkages are driving the development of innovative capacities in China in three respects. First, the global network of ethnic Chinese engineers and technologists, commonly known as the bamboo network, is creating linkages to global technology centers and pools of highly skilled labor crucial to China's technical development. Second, multinationals are showing more willingness to locate research and design activities in China, and these investment projects become training centers for local engineers. Finally, these seeds of innovation planted by multinational investments spread to the broader economy, as Chinese engineers and technologists seek new opportunities in the rapidly growing sectors of the domestic economy.
Taiwanese and Chinese returnees from global centers of innovation, such as Silicon Valley, are at the forefront of China's technological development. These Chinese technologists are yet another manifestation of the ethnic Chinese business networks referred to as the bamboo networks.
In microelectronics, the number of chip designers in China quadrupled in five years to 7,000 in 2003 making China's design workforce almost as large as those in other chip design powerhouses, such as Taiwan and India. Returnees from Silicon Valley and Taiwanese firms have been the driving force behind this explosive growth. Two-thirds of the well-trained designers were working for firms run by Taiwanese or returnees from abroad. A critical mass of experienced returnees is now available, and this creates a snowball effect. These highly experienced returnees start their own China-based technology firms, train local engineers, and transplant the networking associations, such as the Chinese American Semiconductor Professionals Association, that were critical to Chinese entrepreneurship in Silicon Valley.
The same pattern can be found in microelectronics fabrication, an area of manufacturing that requires large numbers of skilled engineers. Semiconductor Manufacturing International Corporation (SMIC), a firm founded by the Taiwanese in 2000, has led China's rapid catch-up to near the technological frontier in process technology. SMIC now competes with Singapore's Chartered as the third largest pureplay foundry (firms which fabricate chips based on customers' designs). The key to SMIC's success is its engineering management team composed of Taiwanese and returnee engineers with decades of fabrication experience in Taiwan, Singapore and the U.S. These engineers in turn have trained hundreds of educated but inexperienced local engineers.
Ethnic Chinese networks are equally active in other areas of IT. Taiwanese firms have embraced a strategy of using mainland China in addition to Taiwan as the foundations of their core competencies, and they are consequently building up their R&D capabilities in China. Given the common cultural background, this movement of R&D facilities is a natural cross-border expansion for Taiwanese corporations. Some large technology firms, such as Hon Hai and Inventec, have even openly proclaimed their intention to become "Greater China" firms rather than simply Taiwanese firms. Inventec, a major producer of notebook computers, calls its Greater China strategy the "Twin Towers" strategy and has its entire software team of 3000 engineers in China.
U.S. utility patent data demonstrates the extent of bamboo network-driven innovation in China. Between 1997 and 2004, firms from the ethnic Chinese economies combined with those founded by returnees created 503 of China's 616 IT corporate U.S. utility patents. In contrast, the domestic firms including the major Chinese champions that get so much press in the West, such as Huawei and Lenovo, contributed only 11.
The impact of the bamboo network is not limited to the technology sectors. In the automotive sector, returnees from abroad are at the core of some of the fastest developing independent firms. Chery began producing cars in 1999 and only four years later had achieved annual sales of 80,000 vehicles. In March 2007, Chery was in the No. 2 sales position, behind Shanghai General Motors. The company epitomizes the broader trend of early success being leveraged into investment in research and design. These efforts revolve around returnees with extensive experience working in multinational auto firms, who were able to harness local talent and push the development process forward far more quickly than would otherwise be the case.
In the past, when advanced industrial countries were fraught with concern about the "hollowing-out" of their manufacturing bases, it was assumed that at least research and development would not be outsourced, as companies often preferred to keep core, value-added R&D activities at home. Nevertheless, the rising cost of R&D in advanced industrial countries, the growing availability of high quality R&D personnel in parts of the developing world and a newfound ability to harness information technology to divide up research and design activities -- what has been called the "death of distance" -- have all changed the calculations of multinational firms.
China is particularly well suited to take advantage of this trend towards the globalization of research and design. This is partly because in the 1990s the Chinese government used the lure of the domestic market to force multinationals to transfer technology and establish design centers there. This explanation however should not be overstated. Multinational firms are quite skilled at placating the Chinese governments with R&D centers that are little more than empty shells. What has proven to be more important are the internal incentives for MNCs to locate research and design activities in China.
Indeed, during the process of luring multinationals into China, firms began to realize how much China had to offer in terms of cheap, trainable science and engineering talent. The sheer numbers are impressive. In 2000, China had 220,000 engineers graduating from its universities. In comparison, the U.S. and the EU-15 together had less than 240,000 engineering university graduates (fewer than 60,000 from the U.S.). The price is also right. The salary of a Chinese electrical engineer is roughly one-tenth the salary of an American one. While it is true that many Chinese engineers are not experienced or efficient at the outset, the large majority of foreign firms can testify that these engineers, particularly the younger ones, are trainable. A large pool of trainable engineering graduates earning low salaries, combined with information technologies capable of linking foreign design centers with headquarters in a home country, make China a highly attractive location for research and design.
In short, multinational firms stumbled into something of a virtuous cycle in China: they came for the market, discovered good (if inexperienced) technologists and engineers at a very attractive price, and they began to utilize this new talent for increasingly sophisticated research and design work. The hope is that these new capabilities will increase both local and global competitiveness.
In the information technology sector, interviews with technologists in 33 foreign firms with R&D activities in China, including eight ethnically Chinese firms, revealed that these firms had trained over 20,000 Chinese engineers by 2004. This number far exceeded the 3,000 engineers doing actual R&D in domestic firms. Moreover, many of these R&D engineers moved from final design work (design for manufacturing) to more technologically sophisticated applied research and even basic fundamental research.
Similarly, in the automotive sector, it is increasingly common to find global firms exploiting design capabilities in China. In 2004, a total of 55 foreign-funded automotive technical centers operated in China. Visteon, Delphi and Bosch all have substantial design centers in Shanghai. PATAC, a JV between General Motors and the Shanghai Auto Industry Corporation, is the most advanced automotive design center in the country playing an increasingly important role in General Motor's success in China .
Although initial investments in auto sector design were made to support local customers, they have been integrated into global design networks. A recent GM SUV was jointly designed by engineers in Canada, the U.S., Japan, and China. Furthermore, the existing R&D centers are serving as a demonstration effect encouraging other MNCs to invest in R&D in China.
The multinational firms that invest in China not only create capabilities to support their own operations, they also create capabilities that can then be used by indigenous Chinese firms. The foreign-invested firms provide a training ground for local engineers and managers, and these skills spill over into the local economy as employees move on to join other firms or to start their own businesses.
The clearest manifestation of this trend is in flows of human capital. In the auto sector, for instance, relatively few domestic firms have the resources to lure talent from abroad, but all the major independent firms have the capability to lure personnel away from joint venture projects. Geely, one of the most successful private auto firms in China, is staffed at all levels with personnel from joint ventures. At the level of mid-level engineer, recent estimates show half of the 300 person design center with a joint venture background -- the next best thing to a returnee from abroad is a person with foreign experience in China.
A relatively recent phenomenon is the emergence of spin-off design firms. In the mobile phone industry, for example, dozens of firms founded by locals trained in MNCs have been created to design phones for the domestic market, including China's largest mobile design firm, Techfaith, founded by ex- Motorola engineers. In both Beijing and Shanghai, teams of engineers have left the JV design centers that they were trained in to create separate design houses catering to the independent Chinese auto firms that have little design capabilities of their own.
The presence of foreign-invested firms is also valuable because they provide immediate solutions as suppliers of key components. Rather than be forced to laboriously create capabilities across the board, these new indigenous firms can choose which capabilities they are going to focus on, and outsource the rest to foreign firms with strong technical capabilities. There is a danger of dependency in this strategy, but it does allow for much more rapid development than would otherwise be possible.
It is critical for companies and countries to understand the implications of China's new, global path to development. Domestic Chinese firms are not set to reorder industries in the manner of Japan's world-class firms in the 1970s and 80s. Rather than China's own companies, the operations of MNCs and smaller firms linked both to bamboo networks and China's foreign-invested sector represent China's competitive challenge to the world.
The global nature of China's technological development has several important implications. First, China's technonationalist goals, most recently highlighted by government calls for indigenous innovation, will be frustrated by China's techno-globalist success. Chinese nationalists should stop wasting public monies on these fruitless efforts and instead embrace the global links that are driving China's technological development. While respecting China's growing capabilities and insisting that it lives up to its WTO obligations, when technonationalist planners in Beijing try to circumvent them, foreign governments (the Pentagon in particular) and companies alike should not mistake China's technonationalist ambitions for its readily realizable goals.
Second, the ties binding China to the global economy are likely to create a different set of political tensions than the rise of Japan did. Domestic fights over trade with Japan tended to be intra-sectoral. With China, the economic "threat" is our own companies exporting from or offshoring progressively high skilled activities to China. In this case, the domestic political fight is closer to a traditional clash between labor and capital.
Third, new trade tensions will require new political solutions. Rather than shifting resources and employment to more competitive sectors -- the American answer to the Japanese challenge -- the new political solution to preserve trade will have to address the concerns of the progressively larger sections of the population affected by economic engagements with China. Part of such a solution should consider taking China's challenge seriously and to increase investment in innovative capacities at home in order to guarantee a prosperous future for the home society. Just as China is increasing its investment in R&D and education of its people, advanced economies need to increase domestic investments in education and R&D to meet the unique challenges of China's rise.
Mr. Fuller is an assistant professor at the Chinese University of Hong Kong. Mr. Thun is the Peter Moores university lecturer in Chinese Business Studies at Oxford's SaÃ¯d Business School.
I think US will be allured to turn right or conservative to protect her people who just sell their labors at high prices. While, educating and training sectors of US are facing huge chances to export their services into China. Even if Chinese gov does not open the local diploma market, the local certification (like CFA) programs can always thrive.