R&D in China: Racing Forward but with Hurdles Ahead

President’s Forward for Research and Development in China

Climbing up the value chain, by boosting innovation capacity, is a key part of China’s national strategy to shift from a quantitative to a qualitative focus on the economy. An estimated United States dollar (USD) 279 billion was spent in China on research and development (R&D) in 2017, a 14 per cent year-on-year increase.[1] The European Chamber’s European Business in China Business Confidence Survey 2017 found that 23 per cent of respondents already consider China’s R&D environment to be more favourable than the worldwide average, an eight per cent increase from 2016. European enterprises must carefully weigh the pros and cons of either establishing R&D operations in China or expanding what they already have.

Foreign-invested enterprises (FIEs) with R&D operations in China traditionally have focused on product localisation, but the increasingly sophisticated demands of Chinese consumers and a greater capacity for innovation has driven more FIEs to expand their local R&D operations. Furthermore, China is quickly taking the lead in technologies like artificial intelligence (AI) and big data, making local R&D centres valuable to FIEs that want to keep pace with their domestic counterparts. New business models and the successful integration of legacy technology for use in new and creative ways have put China on the forefront of technological development. Finally, local talent in China is better educated and connected than ever before.

However, there are significant challenges that bar many FIEs from entering the Chinese R&D landscape. The European Chamber’s European Business in China Business Confidence Survey 2017 found that the three largest issues for FIEs looking to enter China’s R&D environment were the availability of talent, intellectual property (IP) protection and ease of accessing internet services.

Concerns over the availability of talent may seem contradictory given the innovativeness being demonstrated by so many locals, but this is chiefly a matter of supply and demand. Competition over talent is fierce and it can be difficult to hold onto the most skilled and creative minds. European enterprises must tackle this competition head on by exceeding expectations set by R&D experts. With the widening scope of R&D, the domestic talent pool may still be insufficient. The new work permitting process, updated in April 2017, makes it easier to bring in top-level foreign talent, but is now even stricter on those who fail to qualify as ‘top talent’.

Earnest efforts have been underway in China to improve IP protection, but there is still a long way to go. The IP courts that have been a boon to IP protection in Beijing, Guangzhou and Shanghai will soon be extended to Chengdu, Nanjing, Suzhou and Wuhan.[2]  China’s IP laws are steadily improving, however European businesses should still not underestimate related risks, particularly with the rise of cyber espionage.

The state of the Chinese Internet remains a major impediment to FIEs engaging in R&D. While many parts of doing business in China have recently improved, the Internet has not. Due to internet strictures, a lack of easy access to outside information has impeded businesses’ ability to effectively engage in R&D. Even with a licensed virtual private network, many companies still struggle to properly connect to their home offices to carry out vital company operations.

European businesses looking to establish or expand R&D operations must also take local policies into consideration. In 2017, members of the European Chamber found South China (Guangzhou and Shenzhen), Beijing and Shanghai to have the best environments for R&D.

This issue of EURObiz examines many of these issues in detail. A wide variety of experts in a broad range of industries have contributed their thoughts on the current situation. Opportunities and threats alike abound in China for those looking at conducting R&D and these experts offer their knowledge to help readers best navigate this increasingly crucial aspect of business.

[1] China Spends $279 billion on R&D in 2017: Science Minister, Reuters, 27th February 2018, viewed 19th March 2018, <https://www.reuters.com/article/us-china-economy-r-d/china-spends-279-bln-on-rd-in-2017-science-minister-idUSKCN1GB018>

[2] Chen, Crystal, New Intellectual Property Courts to be Established in Nanjing, Suzhou, Chengdu and Wuhan, Tsai Lee & Chen Patent Attorneys & Attorneys at Law, Lexology, 9th May 2017, <https://www.lexology.com/library/detail.aspx?g=ba2cb3c8-b64f-4195-a63b-2ec0d6feb482>